We examined the effect of three months of rosiglitazone treatment (4 mg b.i.d.) on whole-body insulin sensitivity and in vivo peripheral adipocyte insulin sensitivity as assessed by glycerol release in microdialysis from subcutaneous fat during a two-step (20 and 120 mU · m⁻² · min⁻¹) hyperinsulinemic-euglycemic clamp in nine type 2 diabetic subjects. In addition, the effects of rosiglitazone on liver and muscle triglyceride content were assessed by ¹H-nuclear magnetic resonance spectroscopy. Rosiglitazone treatment resulted in a 68% (P < 0.002) and a 20% (P < 0.016) improvement in insulin-stimulated glucose metabolism during the low- and high- dosage−insulin clamps, respectively, which was associated with ∼40% reductions in plasma fatty acid concentration (P < 0.05) and hepatic triglyceride content (P < 0.05). These changes were associated with a 39% increase in extramyocellular lipid content (P < 0.05) and a 52% increase in the sensitivity of peripheral adipocytes to the inhibitory effects of insulin on lipolysis (P = 0.04). In conclusion, these results support the hypothesis that thiazolidinediones enhance insulin sensitivity in patients with type 2 diabetes by promoting increased insulin sensitivity in peripheral adipocytes, which results in lower plasma fatty acid concentrations and a redistribution of intracellular lipid from insulin responsive organs into peripheral adipocytes.