Two specialist laboratories will be set up in London and Oxford to provide islet cells, taken from donor pancreases, for distribution to six regional transplant centres.
The transplant centres will be based in Bristol, Oxford, Manchester, Newcastle and at two locations in London.
It is expected that 20 transplants will take place in the first year of the service, rising to 80 transplants in subsequent years.
To fund this, the DoH will invest up to £2.34 million in the first year, increasing to £7.32 million to meet the predicted annual need in the longer term.
Speaking at the launch of the islet transplant services, health minister Ann Keen said: 'This programme will ensure that people who have been unable to treat hypoglycaemia with conventional therapies will benefit from significant improvements to their quality of life.'
Warwickshire GP Dr Roger Gadsby, a member of the Primary Care Diabetes Society, said: 'This is a very interesting and innovative idea from the DoH that will benefit some type-1 diabetics.
'Having transplantation services in England will provide an opportunity to learn more about the effectiveness of islet transplantation.'
Islet transplants have previously been offered to just 12 patients in England under funding from charities such as Diabetes UK.
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