Type 1 diabetes (T1D) is the result of an autoimmune assault against the insulin-producing pancreatic β-cells, where chronic local inflammation (insulitis) leads to β-cell destruction. T cells and macrophages infiltrate into islets early in T1D pathogenesis. These immune cells secrete cytokines that lead to the production of reactive oxygen species (ROS) and T-cell invasion and activation. Cytokine-signaling pathways are very tightly regulated by protein tyrosine phosphatases (PTPs) to prevent excessive activation. Here, we demonstrate that pancreata from NOD mice with islet infiltration have enhanced oxidation/inactivation of PTPs and STAT1 signaling compared with NOD mice that do not have insulitis. Inactivation of PTPs with sodium orthovanadate in human and rodent islets and β-cells leads to increased activation of interferon signaling and chemokine production mediated by STAT1 phosphorylation. Furthermore, this exacerbated STAT1 activation-induced cell death in islets was prevented by overexpression of the suppressor of cytokine signaling-1 or inactivation of the BH3-only protein Bim. Together our data provide a mechanism by which PTP inactivation induces signaling in pancreatic islets that results in increased expression of inflammatory genes and exacerbated insulitis.