Obesity contributes to the development of type 2 diabetes, but the underlying mechanisms are poorly understood. Using cell culture and mouse models, we show that obesity causes endoplasmic reticulum (ER) stress. This stress in turn leads to suppression of insulin receptor signaling through hyperactivation of c-Jun N-terminal kinase (JNK) and subsequent serine phosphorylation of insulin receptor substrate-1 (IRS-1). Mice deficient in X-box-binding protein-1 (XBP-1), a transcription factor that modulates the ER stress response, develop insulin resistance. These findings demonstrate that ER stress is a central feature of peripheral insulin resistance and type 2 diabetes at the molecular, cellular, and organismal levels. Pharmacologic manipulation of this pathway may offer novel opportunities for treating these common diseases.