The LIM-homeodomain transcription factor ISL1 (islet factor 1) is essential for pancreatic islet cell and dorsal mesenchyme development. Mutations in ISL1 are associated with maturity-onset diabetes of the young and type 2 diabetes. Whether ISL1 plays a role in the insulin gene expression has not been fully elucidated. In the present study, we show that ISL1 can synergistically activate insulin gene transcription with BETA2 in pancreatic beta cells. The protein-protein interactions of ISL1 and BETA2 are directly mediated by the LIM domains of ISL1 and the basic helix-loop-helix domain of BETA2. Deletion of the two LIM domains of ISL1 enhances the transcriptional activation of the insulin gene, indicating a key role for the homeodomain in activating the insulin promoter. Furthermore, ISL1 can bind with the A3/4 box in the rat insulin gene capital I, Ukrainian promoter through its homeodomain. ISL1 expression is up-regulated at the mRNA level in type 2 diabetes (db/db mouse model) but down-regulated by dexamethasone in rat insulinoma cells. These results suggest that ISL1 is a transcriptional activator for insulin gene expression, and the interactions of ISL1 with BETA2 are required for the transcriptional activity of the insulin gene. Reduction in Isl1 gene expression appears to be involved in the impairment of insulin expression mediated by dexamethasone.