Primary islet nonfunction due to an instant blood mediated inflammatory reaction (IBMIR) leads to an increase in donor islet mass required to achieve euglycemia. In the presence of thrombin, thrombomodulin generates activated protein C (APC), which limits procoagulant and proinflammatory responses. In this study, we postulated that liposomal formulations of thrombomodulin (lipo-TM), due to its propensity for preferential uptake in the liver, would enhance intraportal engraftment of allogeneic islets by inhibiting the IBMIR. Diabetic C57BL/6J mice underwent intraportal transplantation with B10.BR murine islets. In the absence of treatment, conversion to euglycemia was observed among 29% of mice receiving 250 allo-islets. In contrast, a single infusion of lipo-TM led to euglycemia in 83% of recipients (p = 0.0019). Fibrin deposition (p < 0.0001), neutrophil infiltration (p < 0.0001), as well as expression TNF-alpha and IL-beta (p < 0.03) were significantly reduced. Significantly, thrombotic responses mediated by human islets in contact with human blood were also reduced by this approach. Lipo-TM improves the engraftment of allogeneic islets through a reduction in local thrombotic and inflammatory processes. As an enzyme-based pharmacotherapeutic, this strategy offers the potential for local generation of APC at the site of islet infusion, during the initial period of elevated thrombin production.