To understand the mechanism by which early insulin therapy improves insulin sensitivity in type 2 diabetes, we investigated endoplasmic reticulum (ER) stress in the liver of type 2 diabetic rats. A high fat diet plus a low dose of streptozotocin (STZ) in Sprague-Dawley (SD) rats was implemented to create an animal model mimicking diabetes. After 3 weeks of insulin treatment, the rats were examined for insulin sensitivity and ER stress in the liver. To investigate insulin sensitivity within the liver, serine phosphorylation of IRS-1 (Ser307) and Akt (Ser473) and expression of gluconeogenic genes, PEPCK and G6Pase, were tested. Protein levels of ER stress markers, such as immunoglobulin binding protein (Bip), inositol-requiring protein 1 alpha (IRE1α), and unspliced and spliced x-box binding protein-1 (XBP-1), were determined to assess ER stress. In the diabetic (DM) group, IRS-1 phosphorylation was increased (P < 0.05), Akt phosphorylation was reduced (P < 0.05), expression of PEPCK and G6Pase was elevated (P < 0.05), and ER stress markers were up-regulated (P < 0.05) relative to the non-diabetic rats. In the insulin (INS) therapy group, all of aforementioned changes were attenuated or reversed (P < 0.05). In addition, c-Jun N-terminal kinase (JNK) activity and SREBP-1 expression were decreased (P < 0.05). Adipose tissue mass was increased (P < 0.05). These data suggest that short-term insulin therapy relieved ER stress and enhanced insulin sensitivity in the liver of diabetic rats. The mechanism is likely related to fat redistribution from liver to adipose tissue. These cellular and molecular responses may represent a mechanism for improvement of insulin sensitivity in type 2 diabetic rats by insulin therapy.