This study investigated the effects and potential mechanisms of the Astragali Radix-Coptidis Rhizoma herb pair (ARCR) on improving islet function in type 2 diabetes mellitus (T2DM) mice by regulating pancreatic β-cell dedifferentiation. A T2DM mouse model was established using a high-sugar, high-fat diet combined with streptozotocin (STZ) injection. The mice were randomly divided into the control group (Con), the model group (Mod), the metformin group (Met), low-dose ARCR group (ARCR-L), and high-dose ARCR group (ARCR-H). After eight weeks of continuous intervention, fasting blood glucose (FBG), total cholesterol (TC), triglycerides (TG), low-density lipoprotein cholesterol (LDL-C), and high-density lipoprotein cholesterol (HDL-C) levels were measured by biochemical assays. Fasting insulin (FINS) and free fatty acid (FFA) levels were detected using ELISA. Blood glucose levels during the oral glucose tolerance test (OGTT) and intraperitoneal insulin tolerance test (IPITT) were measured with a glucometer, and the area under the curve (AUC) was calculated. Pancreatic histopathology was examined by HE staining. Insulin (INS) expression in pancreatic tissue was detected via immunofluorescence. Expression of pancreatic and duodenal homeobox 1 (PDX1) and NANOG homeobox protein (NANOG) in pancreatic tissue was detected by immunohistochemistry. Protein expression levels of phosphorylated phosphoinositide 3-kinase (p-PI3K), phosphorylated protein kinase B (p-AKT), and phosphorylated forkhead box protein O1 (p-FOXO1) were determined by Western blot. The results showed that compared with Con, the Mod had increased FBG, decreased FINS, and increased AUC for both OGTT and IPITT (all P < 0.01). Levels of TC, TG, LDL-C, and FFA were elevated (P < 0.01), while HDL-C was reduced (P < 0.05). Pancreatic histomorphology revealed disordered islet structure, reduced islet area, and inflammatory infiltration. Protein expression of INS, PDX1, p-PI3K, p-AKT, and p-FOXO1 in pancreatic tissue was decreased, whereas NANOG expression was increased (all P < 0.01). Compared with Mod, both the ARCR-L and ARCR-H exhibited reduced FBG, increased FINS, and decreased AUC (P < 0.05 or P < 0.01). Levels of TC, TG, and LDL-C were reduced (P < 0.01 or P < 0.05), while only the ARCR-H showed a significant decrease in FFA (P < 0.05). No significant difference in HDL-C was observed among the groups. Islet morphology was improved, with alleviated inflammatory cell infiltration. Protein expression of INS, PDX1, p-AKT, and p-FOXO1 was increased (P < 0.01 or P < 0.05). Only the ARCR-H demonstrated decreased NANOG expression and increased p-PI3K expression (P < 0.05). In conclusion, the ARCR can improve pancreatic β-cell function in T2DM mice by inhibiting β-cell dedifferentiation, and its mechanism may be associated with activation of the PI3K/AKT/FOXO1 signaling pathway.