Insulin secretion is tightly controlled through coordinated actions of a number of systemic and local factors. Peptide YY (PYY) is expressed in α-cells of the islet, but its role in control of islet function such as insulin release is not clear. In this study, we generated a transgenic mouse model (Pyy(tg/+)/Rip-Cre) overexpressing the Pyy gene under the control of the rat insulin 2 gene promoter and assessed the impact of islet-released PYY on β-cell function, insulin release, and glucose homeostasis in mice. Our results show that up-regulation of PYY in islet β-cells leads to an increase in serum insulin levels as well as improved glucose tolerance. Interestingly, PYY-overproducing mice show increased lean mass and reduced fat mass with no significant changes in food intake or body weight. Energy expenditure is also increased accompanied by increased respiratory exchange ratio. Mechanistically, the enhanced insulin levels and improved glucose tolerance are primarily due to increased β-cell mass and secretion. This is associated with alterations in the expression of genes important for β-cell proliferation and function as well as the maintenance of the β-cell phenotype. Taken together, these data demonstrate that pancreatic islet-derived PYY plays an important role in controlling glucose homeostasis through the modulation of β-cell mass and function.