Summary Grain/seed yield and plant stress tolerance are two major traits that determine the yield potential of many crops. In cereals, grain size is one of the key factors affecting grain yield. Here, we identify and characterize a newly discovered gene Rice Big Grain 1 (RBG1) that regulates grain and organ development, as well as abiotic stress tolerance. Ectopic expression of RBG1 leads to significant increases in the size of not only grains but also other major organs such as roots, shoots and panicles. Increased grain size is primarily due to elevated cell numbers rather than cell enlargement. RBG1 is preferentially expressed in meristematic and proliferating tissues. Ectopic expression of RBG1 promotes cell division, and RBG1 co‐localizes with microtubules known to be involved in cell division, which may account for the increase in organ size. Ectopic expression of RBG1 also increases auxin accumulation and sensitivity, which facilitates root development, particularly crown roots. Moreover, overexpression of RBG1 up‐regulated a large number of heat‐shock proteins, leading to enhanced tolerance to heat, osmotic and salt stresses, as well as rapid recovery from water‐deficit stress. Ectopic expression of RBG1 regulated by a specific constitutive promoter, GOS2, enhanced harvest index and grain yield in rice. Taken together, we have discovered that RBG1 regulates two distinct and important traits in rice, namely grain yield and stress tolerance, via its effects on cell division, auxin and stress protein induction.