Islet transplantation is a promising therapy for type 1 diabetes. However, chronic immunosuppression to control rejection of allogeneic islets induces morbidities and impairs islet function. T effector cells are responsible for islet allograft rejection and express Fas death receptors following activation, becoming sensitive to Fas-mediated apoptosis. Here, we report that localized immunomodulation using microgels presenting an apoptotic form of the Fas ligand with streptavidin (SA-FasL) results in prolonged survival of allogeneic islet grafts in diabetic mice. A short course of rapamycin treatment boosted the immunomodulatory efficacy of SA-FasL microgels, resulting in acceptance and function of allografts over 200 days. Survivors generated normal systemic responses to donor antigens, implying immune privilege of the graft, and had increased CD4+CD25+FoxP3+ T regulatory cells in the graft and draining lymph nodes. Deletion of T regulatory cells resulted in acute rejection of established islet allografts. This localized immunomodulatory biomaterial-enabled approach may provide an alternative to chronic immunosuppression for clinical islet transplantation.