Chronic endoplasmic reticulum (ER) stress is a major contributor to obesity-induced insulin resistance in the liver. However, the molecular link between obesity and ER stress remains to be identified. Proteasomes are important multicatalytic enzyme complexes that degrade misfolded and oxidized proteins. Here, we report that both mouse models of obesity and diabetes and proteasome activator (PA)28-null mice showed 30-40% reduction in proteasome activity and accumulation of polyubiquitinated proteins in the liver. PA28-null mice also showed hepatic steatosis, decreased hepatic insulin signaling, and increased hepatic glucose production. The link between proteasome dysfunction and hepatic insulin resistance involves ER stress leading to hyperactivation of c-Jun NH₂-terminal kinase in the liver. Administration of a chemical chaperone, phenylbutyric acid (PBA), partially rescued the phenotypes of PA28-null mice. To confirm part of the results obtained from in vivo experiments, we pretreated rat hepatoma-derived H4IIEC3 cells with bortezomib, a selective inhibitor of the 26S proteasome. Bortezomib causes ER stress and insulin resistance in vitro--responses that are partly blocked by PBA. Taken together, our data suggest that proteasome dysfunction mediates obesity-induced ER stress, leading to insulin resistance in the liver.