We carried out a genetic screen for diabetes quantitative trait loci (QTL) in an F2 intercross between C57BL/6 (diabetes resistant) and BTBR (diabetes susceptible) mouse strains. All of the F2 mice were made obese with the Leptinob mutation. We mapped a locus on chromosome 19 that was linked to reduced fasting insulin levels. Using a panel of 11 interval-specific congenic mouse strains, we identified Sorcs1 as the gene responsible for the QTL. Studies in several human populations showed an association with SNPs at SORCS1, and type 2 diabetes as well as diabetes complications. We derived a Sorcs1 knockout mouse. When made obese, these mice developed severe diabetes. Islets isolated from these mice were pale in appearance, due to a severe deficiency of insulin granules. Sorcs1 is located in the trans-Golgi network and appears to play a role in the production of insulin granules. In the absence of Sorcs1, insulin is rapidly degraded. Using a “timer” fluorescent probe, we found that after stimulation by glucose, there is a failure to rapidly replenish insulin granules that have been recruited for exocytosis. Overexpression of Sorcs1 led to an increase in secretory granules, showing that Sorcs1 is sufficient to promote insulin granule formation. These studies thus show that defects in insulin granule formation can be a genetic cause of type 2 diabetes.