The homeodomain transcription factor Pdx-1 has important roles in pancreas and islet development as well as in β-cell function and survival. We previously reported that Pdx-1 overexpression stimulates islet cell proliferation, but the mechanism remains unclear. Here, we demonstrate that overexpression of Pdx-1 triggers proliferation largely by a non-cell-autonomous mechanism mediated by soluble factors. Consistent with this idea, overexpression of Pdx-1 under the control of a β-cell-specific promoter (rat insulin promoter [RIP]) stimulates proliferation of both α and β cells, and overexpression of Pdx-1 in islets separated by a Transwell membrane from islets lacking Pdx-1 overexpression activates proliferation in the untreated islets. Microarray and gene ontology (GO) analysis identified inhibin beta-B (Inhbb), an activin subunit and member of the transforming growth factor β (TGF-β) superfamily, as a Pdx-1-responsive gene. Overexpression of Inhbb or addition of activin B stimulates rat islet cell and β-cell proliferation, and the activin receptors RIIA and RIIB are required for the full proliferative effects of Pdx-1 in rat islets. In human islets, Inhbb overexpression stimulates total islet cell proliferation and potentiates Pdx-1-stimulated proliferation of total islet cells and β cells. In sum, this study identifies a mechanism by which Pdx-1 induces a soluble factor that is sufficient to stimulate both rat and human islet cell proliferation.