Fibroblast growth factor 21 (FGF21) is known as a potent metabolic regulator but its protective mechanisms against lipotoxicity-induced β-cell dysfunction and apoptosis remain elusive. Here, we aimed to examine the regulatory pathways whereby FGF21 mediates islet lipid metabolism in lipotoxicity-treated cells and animal models. Rat β-cell line (INS-1E cells) and islets isolated from C57/BL6J mice were exposed to palmitic acid (PA) with/without FGF21, mimicking lipotoxic conditions. Resultant insulin secretion and intracellular signaling were analyzed with Western blotting and RNA-seq. C57/BL6J and global FGF21 knockout (KO) mice were fed with a high-fat diet (HFD) to induce lipotoxicity and given with a long-acting mimetic of FGF21. Insulin resistance and β-cell function were then assessed using homeostasis model assessment of insulin resistance (HOMA-IR) and insulinogenic index. FGF21 ameliorated PA-induced lipid accumulation, reversed cell apoptosis, and enhanced glucose-stimulated insulin secretion (GSIS) as impaired by lipotoxicity in islet β-cells. Mechanistically, FGF21 exerted its beneficial effects through activation of AMPK-ACC (acetyl-CoA carboxylase) pathway and peroxisome proliferation-activated receptors (PPARs) δ/γ signaling, thus increasing the levels of carnitine palmitoyltransferase-1A (CPT1A) and leading to increased fatty acid (FA) oxidation and reduced lipid deposition in β-cells. Interestingly, FGF21 reduced PA-induced cell death via restoration of the expression of apoptosis inhibitor Birc3. In vivo studies further showed that FGF21 is critical for islet insulinogenic capacity and normal function in the context of HFD-treated animals. FGF21 down-regulates islet cell lipid accumulation, probably via activation of AMPK-ACC and PPARδ/γ signaling, and reduces cell death under lipotoxicity, indicating that FGF21 is protective against lipotoxicity-induced β-cell dysfunction and apoptosis.