Pancreatic β cell destruction and dysfunction induced by cytokines is a major cause of type 1 diabetes. Paraoxonase 1 (PON1), an arylesterase with antioxidant activity, has been shown to play an important role in preventing the development of diabetes in transgenic mice. However, no studies have examined the anti-diabetic effect of PON1 delivered to β cells using protein transduction. In this study, we expressed the cell-permeable PON1 fused with PEP-1 protein transduction domain (PEP-1-PON1) to investigate whether transduced PEP-1-PON1 protects β cells against cytokine-induced cytotoxicity. PEP-1-PON1 was effectively delivered to INS-1 cells and prevented cytokine-induced cell destruction in a dose-dependent manner. Transduced PEP-1-PON1 significantly reduced the levels of reactive oxygen species (ROS) and nitic oxide (NO), DNA fragmentation, and expression of inflammatory mediators, endoplasmic reticulum (ER) stress proteins, and apoptosis-related proteins in cytokine-treated cells. Moreover, transduced PEP-1-PON1 restored the decrease in basal and glucose-stimulated insulin secretion induced by cytokines. These data indicate that PEP-1-PON1 protects β cells from cytokine-induced cytotoxicity by alleviating oxidative/nitrosative stress, ER stress, and inflammation. Thus, PEP-1-mediated PON1 transduction might be an effective method to reduce the extent of destruction and dysfunction of pancreatic β cells in autoimmune diabetes.