The aim of the study was to isolate and quantify flavonoids from ethanol extract of Costus igneus rhizome (CiREE) and to find the impact of CiREE on hypoglycaemic effect, electron microscopical study of pancreas in streptozotocin (STZ)-induced diabetic rats. Quercetin (Rf- 0.72, 0.794%) and kaempferol (Rf- 0.35, 4.2%) were quantified by HPTLC using solvent ratio of Toluene:Ethyl acetate:Acetic acid:Methanol (2:7:0.25:0.25) and Toluene:Ethyl acetate:Methanol:Formic acid (6:3:0.2:0.4) respectively. Quercetin derivative compound was characterized by H¹, C¹³ NMR. The CiREE at a dose of 100, 200mg/kg were orally administered as a single dose per day to diabetes-induced rats for a period of 30 days. The effect of CiREE on blood glucose, plasma insulin, liver glycogen, HbA1c and serum lipid profile (Total cholesterol [TC], Triglyceride [TG], Very low density lipoprotein [VLDL], Low density lipoprotein [LDL], High density lipoprotein [HDL]) were measured, histopathological and electron microscopical studies of pancreas were done in normal and diabetic rats. The results showed that fasting rat's blood glucose, serum TC, TG, LDL, VLDL levels were significantly (P<0.05) increased whereas serum HDL, glycogen and insulin level were significantly (P<0.05) decreased in the diabetic rats, after treatment with CiREE these levels were reverse back to normal. The dosage of 200mg/kg is more effective than that of 100mg/kg. Histopathological and Electron microscopical study of pancreas revealed that number of β-cells and insulin granules are increased in diabetes-induced rats after treatment with CiREE for 30 days. Our investigation thus shows that CiREE has potent antidiabetic and hypolipidemic effects in STZ-induced diabetic rats and these effects were much comparable to that of the standard reference drug glibenclamide.