Lipotoxicity has been implicated in pancreatic β-cell dysfunction in type 2 diabetes, but the exact mechanisms remain unknown. The current study explored the role of the endoplasmic reticulum (ER) stress pathway in cholesterol-induced lipotoxicity. Two different insulinoma cell lines were treated with cholesterol with or without inhibitors. ER stress-associated proteins glucose-regulated protein (GRP) 78, activating transcription factor (ATF) 4 and C/EBP homologous protein (CHOP), as was phosphorylation of eukaryotic initiation factor (EIF) 2α, were all up-regulated by cholesterol. Cholesterol also up-regulated microtubule-associated protein 1 light chain 3 (LC3)-II and stimulated the formation of autophagic vacuoles and LC3-II aggregates. Cholesterol-induced autophagy and cell injuries were suppressed by pretreatment with the ER stress inhibitor 4-phenylbutyrate (4-PBA). Pretreatment with autophagy inhibitors E-64d/pepstatin A increased ER stress-induced cell injuries as indicated by increased cell apoptosis and decreased insulin secretion. These results suggest that cholesterol treatment induces apoptosis and dysfunction of β-cells, and enhances autophagy through activation of the ER stress pathway. More importantly, autophagy induced by cholesterol may protect β-cells against ER stress-associated cell damages.