There are strong links between obesity, elevated free fatty acids, and type 2 diabetes. Specifically, the saturated fatty acid palmitate has pleiotropic effects on -cell function and survival. In the present study, we sought to determine the mechanism by which palmitate affects intracellular Ca²⁺, and in particular the role of the endoplasmic reticulum (ER). In human -cells and MIN6 cells, palmitate rapidly increased cytosolic Ca²⁺ through a combination of Ca²⁺ store release and extracellular Ca²⁺ influx. Palmitate caused a reversible lowering of ER Ca²⁺, measured directly with the fluorescent protein-based ER Ca²⁺ sensor, D1ER. Using another genetically encoded indicator, we observed long-lasting oscillations of cytosolic Ca²⁺ in palmitate-treated cells. In keeping with this observed ER Ca²⁺ depletion, palmitate induced rapid phosphorylation of the ER calcium sensor PERK, and subsequently ER-stress and -cell death. We detected little palmitate-induced insulin secretion, suggesting these Ca²⁺ signals are poorly coupled to exocytosis. In summary, we have characterized Ca²⁺-dependent mechanisms involved in altered -cell function and survival induced by the free fatty acid palmitate. We present the first direct evidence that free fatty acids reduce ER Ca²⁺ and shed light on pathways involved in lipotoxicity and the pathogenesis of type 2 diabetes.