The effects of high-fat diet (HFD) and postprandial endotoxemia on the development of type 2 diabetes are not fully understood. Here we show that the serine protease prostasin (PRSS8) regulates hepatic insulin sensitivity by modulating Toll-like receptor 4 (TLR4)-mediated signalling. HFD triggers the suppression of PRSS8 expression by inducing endoplasmic reticulum (ER) stress and increases the TLR4 level in the liver. PRSS8 releases the ectodomain of TLR4 by cleaving it, which results in a reduction in the full-length form and reduces the activation of TLR4. Liver-specific PRSS8 knockout (LKO) mice develop insulin resistance associated with the increase in hepatic TLR4. Restoration of PRSS8 expression in livers of HFD, LKO and db/db mice decreases the TLR4 level and ameliorates insulin resistance. These results identify a novel physiological role for PRSS8 in the liver and provide new insight into the development of diabetes resulting from HFD or metabolic endotoxemia.