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.