Gene regulatory variation is an important driver of the evolution of physiological and developmental responses to the environment. The abscisic acid (ABA) signaling pathway has long been studied as a key component of the cellular response to abiotic stresses in plants. We identify two haplotypes in an Arabidopsis thaliana transcription factor, AREB1, which plays a central role in ABA-mediated response to osmotic stress. These two haplotypes show the sequence signature of long-term maintenance of genetic diversity, suggesting a role for a diversifying selection process such as balancing selection. We find that the two haplotypes, distinguished by a large number of single nucleotide polymorphisms and the presence or absence of four small insertion/deletions in AREB1 intron 1 and exon 2, are at roughly equal frequencies in Arabidopsis, and show high linkage disequilibrium and deep sequence divergence. We use a transgenic approach, along with mRNA Sequencing-based assay of genome-wide expression levels, and find considerable functional divergence between alleles representing the two haplotype groups. Specifically, we find that, under benign soil–water conditions, transgenic lines containing different AREB1 alleles differ in the expression of a large number of genes associated with pathogen response. There are relatively modest gene expression differences between the two transgenic lines under restricted soil water content. Our finding of pathogen-related activity expands the known roles of AREB1 in A. thaliana and reveals the molecular basis of gene-by-environment interaction in a putatively adaptive plant regulatory protein.