A plethora of candidate genes have been identified for complex polygenic disorders, but the underlying disease mechanisms remain largely unknown. We explored the pathophysiology of type 2 diabetes (T2D) by analyzing global gene expression in human pancreatic islets. A group of coexpressed genes (module), enriched for interleukin-1-related genes, was associated with T2D and reduced insulin secretion. One of the module genes that was highly overexpressed in islets from T2D patients is SFRP4, which encodes secreted frizzled-related protein 4. SFRP4 expression correlated with inflammatory markers, and its release from islets was stimulated by interleukin-1β. Elevated systemic SFRP4 caused reduced glucose tolerance through decreased islet expression of Ca(2+) channels and suppressed insulin exocytosis. SFRP4 thus provides a link between islet inflammation and impaired insulin secretion. Moreover, the protein was increased in serum from T2D patients several years before the diagnosis, suggesting that SFRP4 could be a potential biomarker for islet dysfunction in T2D.