Diabetes is associated with the death and dysfunction of insulin-producing pancreatic β-cells. In other systems, Musashi genes regulate cell fate via Notch signaling, which we recently showed regulates β-cell survival. Here we show for the first time that human and mouse adult islet cells express mRNA and protein of both Musashi isoforms, as well Numb/Notch/Hes/neurogenin-3 pathway components. Musashi expression was observed in insulin/glucagon double-positive cells during human fetal development and increased during directed differentiation of human embryonic stem cells (hESCs) to the pancreatic lineage. De-differentiation of β-cells with activin A increased Msi1 expression. Endoplasmic reticulum (ER) stress increased Msi2 and Hes1, while it decreased Ins1 and Ins2 expression, revealing a molecular link between ER stress and β-cell dedifferentiation in type 2 diabetes. These effects were independent of changes in Numb protein levels and Notch activation. Overexpression of MSI1 was sufficient to increase Hes1, stimulate proliferation, inhibit apoptosis and reduce insulin expression, whereas Msi1 knockdown had the converse effects on proliferation and insulin expression. Overexpression of MSI2 resulted in a decrease in MSI1 expression. Taken together, these results demonstrate overlapping, but distinct roles for Musashi-1 and Musashi-2 in the control of insulin expression and β-cell proliferation. Our data also suggest that Musashi is a novel link between ER stress and the compensatory β-cell proliferation and the loss of β-cell gene expression seen in specific phases of the progression to type 2 diabetes.