Melbourne researchers say they have made a significant breakthrough for people with type one diabetes.

Scientists at the Walter and Eliza Hall Institute say they have identified stem cells in the adult pancreas and converted them into insulin-producing cells.

They found the cells continued to function when they were transplanted into mice.

The institute's Professor Len Harrison says the finding has the potential to cure the disease.

"This means that the potential to regenerate insulin-producing cells in someone with type one diabetes is there," he said.

"It's a question of working out how to make that happen in order to reverse or cure type one diabetes."

Professor Harrison says suppressing the immune system's response to the new cells is pivotal.

"There can really be no cure for type one diabetes, even with stem cells, even under the most ideal conditions unless the immune system is prevented from seeing them as foreign and attacking them," he said.

"Prevention of type one diabetes is very fundamental to its cure."