Diabetes is a major chronic disease with an excessive healthcare burden on society 1 . A coding variant (p.Arg192His) in the transcription factor PAX4 is uniquely and reproducibly associated with an altered risk for type 2 diabetes (T2D) in East Asian populations 2–7 , whilst rare PAX4 alleles have been proposed to cause monogenic diabetes 8 . In mice, Pax4 is essential for beta cell formation but neither the role of diabetes-associated variants in PAX4 nor PAX4 itself on human beta cell development and/or function are known. Here, we demonstrate that non-diabetic carriers of either the PAX4 p.Arg192His or a newly identified p.Tyr186X allele exhibit decreased pancreatic beta cell function. In the human beta cell model, EndoC-βH1, PAX4 knockdown led to impaired insulin secretion, reduced total insulin content, and altered hormone gene expression. Deletion of PAX4 in isogenic human induced pluripotent stem cell (hiPSC)-derived beta-like cells resulted in derepression of alpha cell gene expression whilst in vitro differentiation of hiPSCs from carriers of PAX4 p.His192 and p.X186 alleles exhibited increased polyhormonal endocrine cell formation and reduced insulin content. In silico and in vitro studies showed that these PAX4 alleles cause either reduced PAX4 expression or function. Correction of the diabetes-associated PAX4 alleles reversed these phenotypic changes. Together, we demonstrate the role of PAX4 in human endocrine cell development, beta cell function, and its contribution to T2D-risk.