Deficient vascularization is a major driver of early islet graft loss and one of the primary reasons for the failure of islet transplantation as a viable treatment for type 1 diabetes. This study identifies the protein tyrosine phosphatase 1B (PTP1B) as a potential modulator of islet graft revascularization. We demonstrate that grafts of pancreatic islets lacking PTP1B exhibit increased revascularization, which is accompanied by improved graft survival and function, and recovery of normoglycemia and glucose tolerance in diabetic mice transplanted with PTP1B-deficient islets. Mechanistically, we show that the absence of PTP1B leads to activation of hypoxia-inducible factor 1α-independent peroxisome proliferator-activated receptor γ coactivator 1α/estrogen-related receptor α signaling and enhanced expression and production of vascular endothelial growth factor A (VEGF-A) by β cells. These observations were reproduced in human islets. Together, these findings reveal that PTP1B regulates islet VEGF-A production and suggest that this phosphatase could be targeted to improve islet transplantation outcomes.