Current knowledge about the role of epigenetics in type 2 diabetes (T2D) remains limited. Only a few studies have investigated DNA methylation of selected candidate genes or a very small fraction of genomic CpG sites in human pancreatic islets, the tissue of primary pathogenic importance for diabetes. Our aim was to characterize the whole-genome DNA methylation landscape in human pancreatic islets, to identify differentially methylated regions (DMRs) in diabetic islets, and to investigate the function of DMRs in islet biology. Here, we performed whole-genome bisulfite sequencing, which is a comprehensive and unbiased method to study DNA methylation throughout the genome at a single nucleotide resolution, in pancreatic islets from donors with T2D and control subjects without diabetes. We identified 25,820 DMRs in islets from individuals with T2D. These DMRs cover loci with known islet function, e.g., PDX1, TCF7L2, and ADCY5. Importantly, binding sites previously identified by ChIP-seq for islet-specific transcription factors, enhancer regions, and different histone marks were enriched in the T2D-associated DMRs. We also identified 457 genes, including NR4A3, PARK2, PID1, SLC2A2, and SOCS2, that had both DMRs and significant expression changes in T2D islets. To mimic the situation in T2D islets, candidate genes were overexpressed or silenced in cultured β-cells. This resulted in impaired insulin secretion, thereby connecting differential methylation to islet dysfunction. We further explored the islet methylome and found a strong link between methylation levels and histone marks. Additionally, DNA methylation in different genomic regions and of different transcript types (i.e., protein coding, noncoding, and pseudogenes) was associated with islet expression levels. Our study provides a comprehensive picture of the islet DNA methylome in individuals with and without diabetes and highlights the importance of epigenetic dysregulation in pancreatic islets and T2D pathogenesis.