Although it is hoped that eventually the procedure will mean patients no longer need insulin injections, critics have warned there is a danger that a deadly pig disease could cause a pandemic among humans.
David Cunliffe, the health minister, said: "This is a critical new technology that could well make New Zealand a world leader in both the treatment of diabetes and in the use of xenotransplantation.
"It remains clear to me that any such trial will always carry a very low residual risk, so the key issue has always been whether this risk is sufficiently small and can be successfully managed."
He imposed rigorous conditions, including monitoring by an independent panel of experts.
The approval is the end of a two-year application process by Living Cell Technologies, a company founded by Professor Bob Elliott, who has pioneered research in the treatment of type-1 diabetes.
Islet cells from the pancreas of pigs are coated with a seaweed gel and implanted into the abdomen of patients to manufacture insulin and help control their blood sugar levels.
Professor Elliott began the research more than 12 years ago, but a series of experimental injections of pig cells into six volunteers he carried out in 1996-97 was halted by the government after concern about the disease risk.
The New Zealand Medical Association warned in 2005 that a virus transmitted from pig cells to humans could potentially kill millions of people.
A delighted Professor Elliott said last night that his reaction was one of huge excitement and relief.
"This is a world first," he said.
"It will do something that I think all diabetics have been wanting, which is a self-regulating cell which will produce insulin on demand and stop producing when it's not needed."
The implants, to be marketed as DiabeCellB, have been tested at relatively low dosages on a handful of volunteers in Russia since June this year.
Four of the eight New Zealand volunteers taking part in the trial at Auckland's Middlemore Hospital will receive a stronger dose than any of the Russians has received.
Government ministers in Wellington were deluged with emails from around the world over the weekend urging them to give the green light to the experiment.
The piglets to be used are being kept in quarantine after being bred from a unique herd that lives on the sub-Antarctic Auckland Islands.
The herd has been isolated for 200 years, meaning that the pigs are free from retroviruses.
Mike Smith, president of Diabetes New Zealand, said: "If it's going to be a breakthrough for people with type-1 diabetes, then it can only be good, as long as all the protocols are followed."
By Paul Chapman in Wellington
Last Updated: 10:05PM BST 21 Oct 2008