The lipogenic gene stearoyl-CoA desaturase (SCD)1 appears to be a promising new target for obesity-related diabetes, as mice deficient in this enzyme are resistant to diet- and leptin deficiency–induced obesity. The BTBR mouse strain replicates many features of insulin resistance found in humans with excess visceral adiposity. Using the hyperinsulinemic-euglycemic clamp technique, we determined that insulin sensitivity was improved in heart, soleus muscle, adipose tissue, and liver of BTBR SCD1-deficient mice. We next determined whether SCD1 deficiency could prevent diabetes in leptin-deficient BTBR mice. Loss of SCD1 in leptin^ob/ob mice unexpectedly accelerated the progression to severe diabetes; 6-week fasting glucose increased ∼70%. In response to a glucose challenge, Scd1^−/− leptin^ob/ob mice had insufficient insulin secretion, resulting in glucose intolerance. A morphologically distinct class of islets isolated from the Scd1^−/− leptin^ob/ob mice had reduced insulin content and increased triglycerides, free fatty acids, esterified cholesterol, and free cholesterol and also a much higher content of saturated fatty acids. We believe the accumulation of lipid is due to an upregulation of lipoprotein lipase (20-fold) and Cd36 (167-fold) and downregulation of lipid oxidation genes in this class of islets. Therefore, although loss of Scd1 has beneficial effects on adiposity, this benefit may come at the expense of β-cells, resulting in an increased risk of diabetes.