Stearoyl-CoA desaturase-1 (SCD-1) is the rate-limiting enzyme in the biosynthesis of monounsaturated fatty acids (MUFA), which are required for efficient neutral lipid esterification. In the present investigation, we demonstrate that loss of SCD-1 activity increases free cholesterol (FC) content and induces Xbp-1 splicing. We assessed the small molecule SCD-1 inhibitor A939572 on [(14)C]stearate incorporation into neutral lipids and found its incorporation into triglyceride was unaffected, whereas labeled cholesteryl ester (CE) content was notably diminished. Using either A939572 or liver knockout mice (LKO), we show that loss of SCD-1 activity increases FC levels and activates the liver X receptor (LXR) pathway. Using adenoviral delivery of an active form of X-box binding protein-1 (Xbp-1; Xbp-1s), we show increased sterol synthesis only when cells lack the ability to generate MUFA. The results of the cell-based model were confirmed in LKO mice where fasting-refeeding decreased CE, increased FC, and increased Xbp-1s. On the basis of the present data, we conclude that SCD-1 activity is required for efficient cholesterol esterification to MUFA and that loss of its activity increases Xbp-1s-mediated FC synthesis. It is likely that the accumulation of FC enhances Xbp-1 splicing, induces LXR transcriptional activity, and increases ABCA1 (ATP-binding cassette transporter A1) expression to maintain cholesterol homeostasis.