Alterations in Ca2+ homeostasis and accumulation of unfolded proteins in the endoplasmic reticulum (ER) lead to an ER stress response. Prolonged ER stress may lead to cell death. Glucose‐regulated protein (GRP) 78 (Bip) is an ER lumen protein whose expression is induced during ER stress. GRP78 is involved in polypeptide translocation across the ER membrane, and also acts as an apoptotic regulator by protecting the host cell against ER stress‐induced cell death, although the mechanism by which GRP78 exerts its cytoprotective effect is not understood. The present study was carried out to determine whether one of the mechanisms of cell death inhibition by GRP78 involves inhibition of caspase activation. Our studies indicate that treatment of cells with ER stress inducers causes GRP78 to redistribute from the ER lumen with subpopulations existing in the cytosol and as an ER transmembrane protein. GRP78 inhibits cytochrome c‐mediated caspase activation in a cell‐free system, and expression of GRP78 blocks both caspase activation and caspase‐mediated cell death. GRP78 forms a complex with caspase‐7 and ‐12 and prevents release of caspase‐12 from the ER. Addition of (d)ATP dissociates this complex and may facilitate movement of caspase‐12 into the cytoplasm to set in motion the cytosolic component of the ER stress‐induced apoptotic cascade. These results define a novel protective role for GRP78 in preventing ER stress‐induced cell death.