One strategy to prevent islet rejection is to create a favorable immune-protective local environment at the transplant site. Herein, we utilize localized cyclosporine A (CsA) delivery to islet grafts via poly(lactic-co-glycolic acid) (PLGA) microparticles to attenuate allograft rejection. CsA-eluting PLGA microparticles were prepared using a single emulsion (oil-in-water) solvent evaporation technique. CsA microparticles alone significantly delayed islet allograft rejection compared to islets alone (p < 0.05). Over 50% (6/11) of recipients receiving CsA microparticles and short-term cytotoxic T lymphocyte-associated antigen 4-Ig (CTLA4-Ig) therapy displayed prolonged allograft survival for 214 days, compared to 25% (2/8) receiving CTLA4-Ig alone. CsA microparticles alone and CsA microparticles + CTLA4-Ig islet allografts exhibited reduced T-cell (CD4+ and CD8+ cells, p < 0.001) and macrophage (CD68+ cells, p < 0.001) infiltration compared to islets alone. We observed the reduced mRNA expression of proinflammatory cytokines (IL-6, IL-10, INF-γ, and TNF-α; p < 0.05) and chemokines (CCL2, CCL5, CCL22, and CXCL10; p < 0.05) in CsA microparticles + CTLA4-Ig allografts compared to islets alone. Long-term islet allografts contained insulin+ and intra-graft FoxP3+ T regulatory cells. The rapid rejection of third-party skin grafts (C3H) in islet allograft recipients suggests that CsA microparticles + CTLA4-Ig therapy induced operational tolerance. This study demonstrates that localized CsA drug delivery plus short-course systemic immunosuppression promotes an immune protective transplant niche for allogeneic islets.