A reduced capacity for insulin to elicit increases in glucose uptake and metabolism in target tissues such as skeletal muscle is a common feature of obesity and diabetes. The association between lipid oversupply and such insulin resistance is well established, and evidence for mechanisms through which lipids could play a causative role in the generation of muscle insulin resistance is reviewed. While the effects of lipids may in part be mediated by substrate competition through the glucose-fatty acid cycle, interference with insulin signal transduction by lipid-activated signalling pathways is also likely to play an important role. Thus, studies of insulin resistance in Type 2 diabetes, obesity, fat-fed animals and lipid-treated cells have identified defects both at the level of insulin receptor-mediated tyrosine phosphorylation and at downstream sites such as protein kinase B (PKB) activation. Lipid signalling molecules can be derived from free fatty acids, and include diacylglycerol, which activates isozymes of the protein kinase C (PKC) family, and ceramide, which has several effectors including PKCs and a protein phosphatase. In addition, elevated lipid availability can increase flux through the hexosamine biosynthesis pathway which can also lead to activation of PKC as well as protein glycosylation and modulation of gene expression. The mechanisms giving rise to decreased insulin signalling include serine/threonine phosphorylation of insulin receptor substrate-1, but also direct inhibition of components such as PKB. Thus lipids can inhibit glucose disposal by causing interference with insulin signal transduction, and most likely by more than one pathway depending on the prevalent species of fatty acids.