In type 2 diabetes, pancreatic beta cells fail to secrete sufficient insulin to overcome peripheral insulin resistance. Intracellular lipid accumulation contributes to beta cell failure through poorly defined mechanisms. Here we report a role for the lipid-regulated protein kinase C isoform PKCepsilon in beta cell dysfunction. Deletion of PKCepsilon augmented insulin secretion and prevented glucose intolerance in fat-fed mice. Importantly, a PKCepsilon-inhibitory peptide improved insulin availability and glucose tolerance in db/db mice with preexisting diabetes. Functional ablation of PKCepsilon selectively enhanced insulin release ex vivo from diabetic or lipid-pretreated islets and optimized the glucose-regulated lipid partitioning that amplifies the secretory response. Independently, PKCepsilon deletion also augmented insulin availability by reducing both whole-body insulin clearance and insulin uptake by hepatocytes. Our findings implicate PKCepsilon in the etiology of beta cell dysfunction and highlight that enhancement of insulin availability, through separate effects on liver and beta cells, provides a rationale for inhibiting PKCepsilon to treat type 2 diabetes.