Islet cell transplantation is a promising option for the restoration of normal glucose homeostasis in patients with type 1 diabetes. Because graft volume is a crucial issue in islet transplantations for patients with diabetes, we evaluated a new method for increasing functional tissue yield in xenogeneic grafts of encapsulated islets. Islets were labeled with three different superparamagnetic iron oxide nano particles (SPIONs; dextran-coated SPION, siloxane-coated SPION, and heparin-coated SPION). Magnetic separation was performed to separate encapsulated islets from the empty capsules, and cell viability and function were tested. Islets labeled with 1000 μg Fe/ml dextran-coated SPIONs experienced a 69.9% reduction in graft volume, with a 33.2% loss of islet-containing capsules. Islets labeled with 100 μg Fe/ml heparin-coated SPIONs showed a 46.4% reduction in graft volume, with a 4.5% loss of capsules containing islets. No purification could be achieved using siloxane-coated SPIONs due to its toxicity to the primary islets. SPION labeling of islets is useful for transplant purification during islet separation as well as in vivo imaging after transplantation. Furthermore, purification of encapsulated islets can also reduce the volume of the encapsulated islets without impairing their function by removing empty capsules.