It is well-established that the administration of streptozotocin accelerates diabetic liver injury as well as type-I diabetes, however the underlying mechanisms are poorly understood. Here we investigated the molecular mechanisms of diabetic liver injury in a model of streptozotocin (STZ)-induced type-I diabetes. STZ administration induced type-1 diabetes and chronic liver injury was associated with increased STAT1, which is implicated in diabetic liver injury by virtue of its ability to promote hepatocyte apoptosis, in the liver and pancreas, which were all strongly inhibited in STAT1(-)(/-) mice. Similarly, STZ-induced ATF3, a stress-inducible gene, was completely abolished in the liver of IFN-gamma(-/-) mice, but not in STAT1(-/-) mice. Inhibition of STAT1 by siRNA or dominant-negative DNA did not affect ATF3 protein expression but blocked IFN-gamma-induced ATF3 translocation from the cytosol into the nucleus. In contrast, inhibition of ATF3 by using siRNA diminished STAT1 protein expression and IFN-gamma/STZ-induced hepatocyte apoptosis. Furthermore, GST pull-down and co-IP assay showed that STAT1 bound to C-terminal domain of ATF3. Such direct interaction increased the stability of STAT1 by inhibiting its ubiquitination as well as proteasome activity. Our results suggest that STAT1 is a common signaling pathway contributing to STZ-induced diabetes and diabetic liver injury. ATF3 functions as a potent regulator of STAT1 stability, accelerating STZ-induced diabetes and diabetic liver injury.