Diarrhea is the predominant symptom of acute gastroenteritis resulting from enteric infections and a leading cause of death in infants and young children. However, the role of the host response in diarrhea pathogenesis is unclear. Using rotavirus and neonatal mice as a model, we found that oral inoculation of UV-inactivated replication-defective rotavirus consistently induced watery diarrhea by robust activation of cytosolic double-stranded RNA sensing pathways and type III interferon (IFN-λ) secretion. Diarrhea was significantly diminished in mice lacking the IFN-λ receptor. Mechanistically, IFN-λ signaling downregulates the expression of Dra, a chloride and bicarbonate exchanger, which contributes to reduced water absorption. We confirmed these findings in mice inoculated with reovirus, as well as in donor-derived human intestinal organoids and human biopsy samples. Our data highlight a mechanism of rapid diarrhea induction by host innate immune sensing in the gastrointestinal tract and suggest that diarrhea induction is an active host defense strategy to eliminate the pathogen.