Intrauterine growth restriction (IUGR) leads to development of type 2 diabetes (T2D) in adulthood. The mechanisms underlying this phenomenon have not been fully elucidated. Inflammation is associated with T2D; however, it is unknown whether inflammation is causal or secondary to the altered metabolic state. Here we show that the mechanism by which IUGR leads to the development of T2D in adulthood is via transient recruitment of T-helper 2 (Th) lymphocytes and macrophages in fetal islets resulting in localized inflammation. Although this immune response is short-lived, it results in a permanent reduction in islet vascularity and impaired insulin secretion. Neutralizing interleukin-4 antibody therapy given only in the newborn period ameliorates inflammation and restores vascularity and β-cell function into adulthood, demonstrating a novel role for Th2 immune responses in the induction and progression of T2D. In the neonatal stage, inflammation and vascular changes are reversible and may define an important developmental window for therapeutic intervention to prevent adult-onset diabetes.