Skeletal muscle insulin resistance entails dysregulation of both glucose and fatty acid metabolism. This study examined whether a combined intervention of physical activity and weight loss influences fasting rates of fat oxidation and insulin-stimulated glucose disposal. Obese (BMI >30 kg/m(2)) volunteers (9 men and 16 women) without diabetes, aged 39 +/- 4 years, completed 16 weeks of moderate-intensity physical activity combined with caloric reduction. Body composition was determined by dual-energy X-ray absorptiometry and computed tomography. Glucose disposal rates (R(d)) were measured during euglycemic hyperinsulinemia (40 mU x m(-2) x min(-1)), and substrate oxidation was determined via indirect calorimetry. Fat mass and regional fat depots were reduced and VO(2max) improved by 19%, from 38.8 +/- 1.2 to 46.0 +/- 1.0 ml x kg fat-free mass (FFM)(-1) x min(-1) (P < 0.05). Insulin sensitivity improved 49 +/- 10% (6.70 +/- 0.40 to 9.51 +/- 0.51 mg x min(-1) x kg FFM(-1); P < 0.05). Rates of fat oxidation following an overnight fast increased (1.16 +/- 0.06 to 1.36 +/- 0.05 mg x min(-1) x kg FFM(-1); P < 0.05), and the proportion of energy derived from fat increased from 38 to 52%. The strongest predictor of the improved insulin sensitivity was enhanced fasting rates of fat oxidation, accounting for 52% of the variance. In conclusion, exercise combined with weight loss enhances postabsorptive fat oxidation, which appears to be a key aspect of the improvement in insulin sensitivity in obesity.