Increased accumulation of fatty acids and their derivatives can impair insulin-stimulated glucose disposal by skeletal muscle. To characterize the nature of the defects in lipid metabolism and to evaluate the effects of thiazolidinedione treatment, we analyzed the levels of triacylglycerol, long-chain fatty acyl-coA, malonyl-CoA, fatty acid oxidation, AMP-activated protein kinase (AMPK), acetyl-CoA carboxylase (ACC), malonyl-CoA decarboxylase, and fatty acid transport proteins in muscle biopsies from nondiabetic lean, obese, and type 2 subjects before and after an euglycemic-hyperinsulinemic clamp as well as pre–and post–3-month rosiglitazone treatment. We observed that low AMPK and high ACC activities resulted in elevation of malonyl-CoA levels and lower fatty acid oxidation rates. These conditions, along with the basal higher expression levels of fatty acid transporters, led accumulation of long-chain fatty acyl-coA and triacylglycerol in insulin-resistant muscle. During the insulin infusion, muscle fatty acid oxidation was reduced to a greater extent in the lean compared with the insulin-resistant subjects. In contrast, isolated muscle mitochondria from the type 2 subjects exhibited a greater rate of fatty acid oxidation compared with the lean group. All of these abnormalities in the type 2 diabetic group were reversed by rosiglitazone treatment. In conclusion, these studies have shown that elevated malonyl-CoA levels and decreased fatty acid oxidation are key abnormalities in insulin-resistant muscle, and, in type 2 diabetic patients, thiazolidinedione treatment can reverse these abnormalities.