Protein-tyrosine phosphatase 1B (PTP-1B) is a major protein-tyrosine phosphatase that has been implicated in the regulation of insulin action, as well as in other signal transduction pathways. To investigate the role of PTP-1B in vivo, we generated homozygotic PTP-1B-null mice by targeted gene disruption. PTP-1B-deficient mice have remarkably low adiposity and are protected from diet-induced obesity. Decreased adiposity is due to a marked reduction in fat cell mass without a decrease in adipocyte number. Leanness in PTP-1B-deficient mice is accompanied by increased basal metabolic rate and total energy expenditure, without marked alteration of uncoupling protein mRNA expression. In addition, insulin-stimulated whole-body glucose disposal is enhanced significantly in PTP-1B-deficient animals, as shown by hyperinsulinemic-euglycemic clamp studies. Remarkably, increased insulin sensitivity in PTP-1B-deficient mice is tissue specific, as insulin-stimulated glucose uptake is elevated in skeletal muscle, whereas adipose tissue is unaffected. Our results identify PTP-1B as a major regulator of energy balance, insulin sensitivity, and body fat stores in vivo.