Increased insulin demand resulting from insulin resistance and/or overnutrition induces a compensatory increase in β-cell mass. The physiological factors responsible for the compensation have not been fully characterized. In zebrafish, overnutrition rapidly induces compensatory β-cell differentiation through triggering the release of a paracrine signal from persistently activated β-cells. We identified Fgf1 signaling as a key component of the overnutrition-induced β-cell differentiation signal in a small molecule screen. Fgf1 was confirmed as the overnutrition-induced β-cell differentiation signal as inactivation of fgf1 abolished the compensatory β-cell differentiation. Furthermore, expression of human FGF1 solely in β-cells in fgf1(-/-) animals rescued the compensatory response indicating that β-cells can be the source of FGF1. Additionally, constitutive secretion of FGF1 with an exogenous signal peptide increased β-cell number in the absence of overnutrition. These results demonstrate that fgf1 is both necessary and FGF1 expression in β-cells is sufficient for the compensatory β-cell differentiation. We further show that FGF1 is secreted during prolonged activation of cultured mammalian β-cells and that ER stress acts upstream of FGF1 release. Thus, the recently discovered anti-diabetic function of FGF1 may act partially through increasing β-cell differentiation.