In this study, we report that the Krüppel-like zinc finger transcription factor Gli-similar 3 (Glis3) is induced during the secondary transition of pancreatic development, a stage of cell lineage specification and extensive patterning, and that Glis3^zf/zf mutant mice develop neonatal diabetes, evidenced by hyperglycemia and hypoinsulinemia. The Glis3^zf/zf mutant mouse pancreas shows a dramatic loss of β and δ cells, contrasting a smaller relative loss of α, PP, and ε cells. In addition, Glis3^zf/zf mutant mice develop ductal cysts, while no significant changes were observed in acini. Gene expression profiling and immunofluorescent staining demonstrated that the expression of pancreatic hormones and several transcription factors important in endocrine cell development, including Ngn3, MafA, and Pdx1, were significantly decreased in the developing pancreata of Glis3^zf/zf mutant mice. The population of pancreatic progenitors appears not to be greatly affected in Glis3^zf/zf mutant mice; however, the number of neurogenin 3 (Ngn3)-positive endocrine cell progenitors is significantly reduced. Our study indicates that Glis3 plays a key role in cell lineage specification, particularly in the development of mature pancreatic β cells. In addition, we provide evidence that Glis3 regulates insulin gene expression through two Glis-binding sites in its proximal promoter, indicating that Glis3 also regulates β-cell function.