Glucotoxicity and lipotoxicity contribute to the impaired β-cell function observed in type 2 diabetes. Here we examine the effect of saturated and unsaturated fatty acids at different glucose concentrations on β-cell proliferation and apoptosis. Adult rat pancreatic islets were cultured onto plates coated with extracellular matrix derived from bovine corneal endothelial cells. Exposure of islets to saturated fatty acid (0.5 mmol/l palmitic acid) in medium containing 5.5, 11.1, or 33.3 mmol/l glucose for 4 days resulted in a five- to ninefold increase of β-cell DNA fragmentation. In contrast, monounsaturated palmitoleic acid alone (0.5 mmol/l) or in combination with palmitic acid (0.25 or 0.5 mmol/l each) did not affect DNA fragmentation. Increasing concentrations of glucose promoted β-cell proliferation that was dramatically reduced by palmitic acid. Palmitoleic acid enhanced the proliferation activity in medium containing 5.5 mmol/l glucose but had no additional effect at higher glucose concentrations (11.1 and 33.3 mmol/l). The cell-permeable ceramide analog C₂-ceramide mimicked both the palmitic acid—induced β-cell apoptosis and decrease in proliferation. Moreover, the ceramide synthetase inhibitor fumonisin B1 blocked the deleterious effects of palmitic acid on β-cell viability. Additionally, palmitic acid but not palmitoleic acid decreased the expression of the mitochondrial adenine nucleotide translocator and induced release of cytochrome c from the mitochondria into the cytosol. Finally, palmitoleic acid improved β-cell—secretory function that was reduced by palmitic acid. Taken together, these results suggest that the lipotoxic effect of the saturated palmitic acid involves an increased apoptosis rate coupled with reduced proliferation capacity of β-cells and impaired insulin secretion. The deleterious effect of palmitate on β-cell turnover is mediated via formation of ceramide and activation of the apoptotic mitochondrial pathway. In contrast, the monounsaturated palmitoleic acid does not affect β-cell apoptosis, yet it promotes β-cell proliferation at low glucose concentrations, counteracting the negative effects of palmitic acid as well as improving β-cell function.