The nuclear receptor peroxisome proliferator-activated receptor gamma (PPAR-gamma) is an important target in diabetes therapy, but its direct role, if any, in the restoration of islet function has remained controversial. To identify potential molecular mechanisms of PPAR-gamma in the islet, we treated diabetic or glucose-intolerant mice with the PPAR-gamma agonist pioglitazone or with a control. Treated mice exhibited significantly improved glycemic control, corresponding to increased serum insulin and enhanced glucose-stimulated insulin release and Ca(2+) responses from isolated islets in vitro. This improved islet function was at least partially attributed to significant upregulation of the islet genes Irs1, SERCA, Ins1/2, and Glut2 in treated animals. The restoration of the Ins1/2 and Glut2 genes corresponded to a two- to threefold increase in the euchromatin marker histone H3 dimethyl-Lys4 at their respective promoters and was coincident with increased nuclear occupancy of the islet methyltransferase Set7/9. Analysis of diabetic islets in vitro suggested that these effects resulting from the presence of the PPAR-gamma agonist may be secondary to improvements in endoplasmic reticulum stress. Consistent with this possibility, incubation of thapsigargin-treated INS-1 beta cells with the PPAR-gamma agonist resulted in the reduction of endoplasmic reticulum stress and restoration of Pdx1 protein levels and Set7/9 nuclear occupancy. We conclude that PPAR-gamma agonists exert a direct effect in diabetic islets to reduce endoplasmic reticulum stress and enhance Pdx1 levels, leading to favorable alterations of the islet gene chromatin architecture.