X-linked inhibitor of apoptosis-associated factor-1 (XAF1) is a stress-inducible tumor suppressor that is commonly inactivated in many human cancers. Despite accumulating evidence for the pro-apoptotic role for XAF1 under various stressful conditions, its involvement in endoplasmic reticulum (ER) stress response remains undefined. Here, we report that XAF1 increases cell sensitivity to ER stress and acts as a molecular switch in unfolded protein response (UPR)-mediated cell-fate decisions favoring apoptosis over adaptive autophagy. Mechanistically, XAF1 interacts with and destabilizes ER stress sensor GRP78 through the assembly of zinc finger protein 313 (ZNF313)-mediated destruction complex. Moreover, XAF1 expression is activated through PERK-Nrf2 signaling and destabilizes C-terminus of Hsc70-interacting protein (CHIP) ubiquitin E3 ligase, thereby blocking CHIP-mediated K63-linked ubiquitination and subsequent phosphorylation of inositol-required enzyme-1α (IRE1α) that is involved in in the adaptive ER stress response. In tumor xenograft assays, XAF1−/− tumors display substantially lower regression compared to XAF1+/+ tumors in response to cytotoxic dose of ER stress inducer. XAF1 and GRP78 expression show an inverse correlation in human cancer cell lines and primary breast carcinomas. Collectively this study uncovers an important role for XAF1 as a linchpin to govern the sensitivity to ER stress and the outcomes of UPR signaling, illuminating the mechanistic consequence of XAF1 inactivation in tumorigenesis.