Insulin is the primary hormone involved in glucose homeostasis, and impairment of insulin action and/or secretion has a critical role in the pathogenesis of diabetes mellitus. Type-II SH2-domain-containing inositol 5-phosphatase, or 'SHIP2', is a member of the inositol polyphosphate 5-phosphatase family. In vitro studies have shown that SHIP2, in response to stimulation by numerous growth factors and insulin, is closely linked to signalling events mediated by both phosphoinositide-3-OH kinase and Ras/mitogen-activated protein kinase. Here we report the generation of mice lacking the SHIP2 gene. Loss of SHIP2 leads to increased sensitivity to insulin, which is characterized by severe neonatal hypoglycaemia, deregulated expression of the genes involved in gluconeogenesis, and perinatal death. Adult mice that are heterozygous for the SHIP2 mutation have increased glucose tolerance and insulin sensitivity associated with an increased recruitment of the GLUT4 glucose transporter and increased glycogen synthesis in skeletal muscles. Our results show that SHIP2 is a potent negative regulator of insulin signalling and insulin sensitivity in vivo.