BACKGROUND Type 2 diabetes often displays hyperlipidemia. We examined palmitate effects on pancreatic islet function in relation to FFA receptor GPR40, NO generation, insulin release, and the PPARgamma agonistic thiazolidinedione, rosiglitazone. PRINCIPAL FINDINGS Rosiglitazone suppressed acute palmitate-stimulated GPR40-transduced PI hydrolysis in HEK293 cells and insulin release from MIN6c cells and mouse islets. Culturing islets 24 h with palmitate at 5 mmol/l glucose induced beta-cell iNOS expression as revealed by confocal microscopy and increased the activities of ncNOS and iNOS associated with suppression of glucose-stimulated insulin response. Rosiglitazone reversed these effects. The expression of iNOS after high-glucose culturing was unaffected by rosiglitazone. Downregulation of GPR40 by antisense treatment abrogated GPR40 expression and suppressed palmitate-induced iNOS activity and insulin release. CONCLUSION We conclude that, in addition to mediating acute FFA-stimulated insulin release, GPR40 is an important regulator of iNOS expression and dysfunctional insulin release during long-term exposure to FFA. The adverse effects of palmitate were counteracted by rosiglitazone at GPR40, suggesting that thiazolidinediones are beneficial for beta-cell function in hyperlipidemic type 2 diabetes.