The nuclear peroxisome proliferator-activated receptor gamma (PPAR gamma) is a transcription factor that is activated by polyunsaturated fatty acids and their metabolites and is essential for fat cell formation. Although obesity is a strong risk factor for type 2 diabetes mellitus and other metabolic diseases, potent PPAR gamma activators such as the glitazone drugs lower glucose and lipid levels in patients with type 2 diabetes and also have antiatherosclerotic and antihypertensive effects. We review recent studies providing insight into the paradoxical relationship between PPAR gamma and metabolic disease. We also review recent advances in understanding the structural basis for PPAR gamma activation by ligands. The unusual ligand-binding properties of PPAR gamma suggest that it will be possible to discover new chemical classes of receptor "modulators" with distinct pharmacological activities for the treatment of type 2 diabetes and other metabolic diseases.