Endothelial activation is a key early event in vascular complications of Type 1 diabetes. The non-obese diabetic (NOD) mouse is a well-characterized model of Type 1 diabetes. We previously reported that Type 1 diabetic NOD mice have increased endothelial activation, with increased production of MCP-1 and IL-6, and a 30% increase of surface VCAM-1 expression leading to a 4-fold increase in monocyte adhesion to the endothelium. Sphingosine-1-phosphate (S1P) prevents monocyte:endothelial interactions in these diabetic NOD mice. Incubation of diabetic NOD endothelial cells (EC) with S1P(100nmol/l) reduced ERK1/2 phosphorylation by 90%, with no significant changes in total ERK1/2 protein. In the current study, we investigated the mechanism of S1P action on ERK1/2 to reduce activation of diabetic endothelium. S1P caused a significant 3-fold increase in mitogen-activated kinase phosphatase-3 (MKP-3) expression in EC. MKP-3 selectively regulates ERK1/2 activity through dephosphorylation. Incubation of diabetic NOD EC with S1P and the S1P1-selective agonist SEW2871 significantly increased expression of MKP-3 and reduced ERK1/2 phosphorylation, while incubation with the S1P1/S1P3 antagonist VPC23019 decreased the expression of MKP-3, both results supporting a role for S1P1 in MKP-3 regulation. To mimic the S1P-mediated induction of MKP-3 diabetic NOD EC, we overexpressed MKP-3 in human aortic endothelial cells (HAEC) cultured in elevated glucose (25mmol/l). Overexpression of MKP-3 in glucose-cultured HAEC decreased ERK1/2 phosphorylation and resulted in decreased monocyte:endothelial interactions in a static monocyte adhesion assay. Finally, we utilized siRNA to MKP-3 and observed increased monocyte adhesion. Moreover, S1P was unable to inhibit monocyte adhesion in the absence of MKP-3. Thus, one mechanism for the anti-inflammatory action of S1P in diabetic EC is inhibition of ERK1/2 phosphorylation through induction of MKP-3 expression via the S1P-S1P1 receptor axis.