Type 2 diabetes is characterized by both peripheral insulin resistance and reduced insulin secretion by beta-cells. The reasons for beta-cell dysfunction in this disease are incompletely understood but may include the accumulation of toxic lipids within this cell type. We examined the role of Abca1, a cellular cholesterol transporter, in cholesterol homeostasis and insulin secretion in beta-cells. Mice with specific inactivation of Abca1 in beta-cells had markedly impaired glucose tolerance and defective insulin secretion but normal insulin sensitivity. Islets isolated from these mice showed altered cholesterol homeostasis and impaired insulin secretion in vitro. We found that rosiglitazone, an activator of the peroxisome proliferator-activated receptor-gamma, which upregulates Abca1 in beta-cells, requires beta-cell Abca1 for its beneficial effects on glucose tolerance. These experiments establish a new role for Abca1 in beta-cell cholesterol homeostasis and insulin secretion, and suggest that cholesterol accumulation may contribute to beta-cell dysfunction in type 2 diabetes.