Background Autophagy is a well-preserved mechanism essential in minimizing endoplasmic reticulum stress (ER)-related cell death. Defects in β-cell autophagy have been linked to type 1 diabetes, particularly deficits in the secretion of insulin, boosting ER stress sensitivity and possibly promoting pancreatic β-cell death. Quercetin (QU) is a potent antioxidant and anti-diabetic flavonoid with low bioavailability, and the precise mechanism of its anti-diabetic activity is still unknown. Aim This study aimed to design an improved bioavailable form of QU (liposomes) and examine the impact of its treatment on the alleviation of type 1 diabetes induced by STZ in rats. Methods Seventy SD rats were allocated into seven equal groups 10 rats of each: control, STZ, STZ + 3-MA, STZ + QU-Lip, and STZ + 3-MA + QU-Lip. Fasting blood glucose, insulin, c-peptide, serum IL-6, TNF-α, pancreatic oxidative stress, TRAF-6, autophagy, endoplasmic reticulum stress (ER stress) markers expression and their regulatory microRNA (miRNA) were performed. As well as, docking analysis for the quercetin, ER stress, and autophagy were done. Finally, the histopathological and immunohistochemical analysis were conducted. Significance QU-Lip significantly decreased glucose levels, oxidative, and inflammatory markers in the pancreas. It also significantly downregulated the expression of ER stress and upregulated autophagic-related markers. Furthermore, QU-Lip significantly ameliorated the expression of several MicroRNAs, which both control autophagy and ER stress signaling pathways. However, the improvement of STZ-diabetic rats was abolished upon combination with an autophagy inhibitor (3-MA). The findings suggest that QU-Lip has therapeutic promise in treating type 1 diabetes by modulating ER stress and autophagy via an epigenetic mechanism.