Correct endoplasmic reticulum (ER) function is critical for the health of secretory cells, such as the pancreatic β-cell, and ER stress is often a contributory factor to β-cell death in type 2 diabetes. We have used an insulin-secreting cell line with inducible expression of dominant negative (DN) HNF1α, a transcription factor vital for correct β-cell development and function, to show that HNF1α is required for Xbp1 transcription and maintenance of the normal ER stress response. DN HNF1α expression sensitizes the β-cell to ER stress by directly down-regulating Xbp1 transcription, whereas Atf6 is unaffected. Furthermore, DN HNF1α alters calcium homeostasis, resulting in elevated cytoplasmic calcium and increased store-operated calcium entry, whereas mitochondrial calcium uptake is normal. Loss of function of XBP1 is toxic to the β-cell and decreases production of the ER chaperone BiP, even in the absence of ER stress. DN HNF1α-induced sensitivity to cyclopiazonic acid can be partially rescued with the chemical chaperone tauroursodeoxycholate. Rat insulin 2 promoter-DN HNF1α mouse islets express lower levels of BiP mRNA, synthesize less insulin, and are sensitized to ER stress relative to matched control mouse islets, suggesting that this mechanism is also operating in vivo.