To determine the role of cholesterol synthesis in pancreatic beta-cells, a transgenic model of in vivo activation of sterol-regulatory element binding protein 2 (SREBP-2) specifically in beta-cells (TgRIP-SREBP-2) was developed and analyzed. Expression of nuclear human SREBP-2 in beta-cells resulted in severe diabetes as evidenced by greater than 5-fold elevations in glycohemoglobin compared with C57BL/6 controls. Diabetes in TgRIP-SREBP-2 mice was primarily due to defects in glucose- and potassium-stimulated insulin secretion as determined by glucose tolerance test. Isolated islets of TgSREBP-2 mice were fewer in number, smaller, deformed, and had decreased insulin content. SREBP-2-expressing islets also contained increased esterified cholesterol and unchanged triglycerides with reduced ATP levels. Consistently, these islets exhibited elevated expression of HMG-CoA synthase and reductase and LDL receptor, with suppression of endogenous SREBPs. Genes involved in beta-cell differentiation, such as PDX1 and BETA2, were suppressed, explaining loss of beta-cell mass, whereas IRS2 expression was not affected. These phenotypes were dependent on the transgene expression. Taken together, these results indicate that activation of SREBP-2 in beta-cells caused severe diabetes by loss of beta-cell mass with accumulation of cholesterol, providing a new lipotoxic model and a potential link of disturbed cholesterol metabolism to impairment of beta-cell function.