Disruption of endoplasmic reticulum (ER) homeostasis is intrinsically linked with lipid metabolism disorder in humans and mice. Whether ER homeostasis is affected in cows with fatty liver is unknown. The aim of this study was to investigate ER status and the potential role of ER stress in the progression of fatty liver in dairy cows. Liver and blood samples were collected from cows diagnosed as healthy (n = 15) or with severe fatty liver (n = 15). Hepatocytes were isolated from calves and treated with various concentrations of fatty acids and/or tauroursodeoxycholic acid (TUDCA), a canonical inhibitor of ER stress. Milk production, dry matter intake, and glucose concentration were lower, and concentrations of fatty acids and β-hydroxybutyrate were greater in dairy cows with severe fatty liver. The phosphorylation level of protein kinase RNA-like ER kinase (PERK) and inositol requiring protein-1a (IRE1a), the cleavage of activating transcription factor-6 (ATF6) protein, and the abundance of several unfolded protein response (UPR) genes (78 kDa glucose-regulated protein, AMP-dependent transcription factor 4, and spliced X-box binding protein 1) were greater in liver of cows with severe fatty liver. Alterations in ER homeostasis with severe fatty liver were associated with greater abundance of sterol regulatory element-binding protein 1c (SREBP-1c) and its target genes acetyl-CoA carboxylase-α (ACACA), fatty acid synthase (FASN), and diacylglycerol acyltransferase 1 (DGAT1). The increase in phosphorylation level of PERK and IRE1a proteins, and the cleavage of ATF6 protein in response to increasing doses of fatty acids (which were reversed by TUDCA treatment) in hepatocytes underscored a mechanistic link between fatty acids and ER stress. Importantly, fatty acids treatment upregulated the abundance of SREBP-1c, ACACA, FASN, and DGAT1 and lipid accumulation in calf hepatocytes, while inhibition of ER stress by TUDCA significantly weakened these effects. Overall, results indicate that an activated ER stress and the ensuing UPR in response to increased influx of fatty acids into hepatocytes are causative of severe fatty liver in dairy cows.