There is no known treatment for fatty liver, a ubiquitous cause of chronic liver disease. However, because it is associated with hyperinsulinemia and insulin-resistance, insulin-sensitizing agents might be beneficial. To evaluate this possibility, insulin-resistant ob/ob mice with fatty livers were treated with metformin, an agent that improves hepatic insulin-resistance. Metformin improved fatty liver disease, reversing hepatomegaly, steatosis and aminotransferase abnormalities. The therapeutic mechanism likely involves inhibited hepatic expression of tumor necrosis factor (TNF) alpha and TNF-inducible factors that promote hepatic lipid accumulation and ATP depletion. These findings suggest a mechanism of action for metformin and identify novel therapeutic targets in insulin-resistant states.