The nuclear receptor peroxisome proliferator-activated receptor gamma (PPARgamma) is involved in glucose homeostasis and synthetic PPARgamma ligands, the thiazolidinediones, a new class of antidiabetic agents that reduce insulin resistance and, as a secondary effect, reduce hepatic glucose output. PPARgamma is highly expressed in normal human pancreatic islet alpha-cells that produce glucagon. This peptide hormone is a functional antagonist of insulin stimulating hepatic glucose output. Therefore, the effect of PPARgamma and thiazolidinediones on glucagon gene transcription was investigated. After transient transfection of a glucagon-reporter fusion gene into a glucagon-producing pancreatic islet cell line, thiazolidinediones inhibited glucagon gene transcription when PPARgamma was coexpressed. They also reduced glucagon secretion and glucagon tissue levels in primary pancreatic islets. A 5'/3'-deletion and internal mutation analysis indicated that a pancreatic islet cell-specific enhancer sequence (PISCES) motif within the proximal glucagon promoter element G1 was required for PPARgamma responsiveness. This sequence motif binds the paired domain transcription factor Pax6. When the PISCES motif within G1 was mutated into a GAL4 binding site, the expression of GAL4-Pax6 restored glucagon promoter activity and PPARgamma responsiveness. GAL4-Pax6 transcriptional activity was inhibited by PPARgamma in response to thiazolidinedione treatment also at a minimal viral promoter. These results suggest that PPARgamma in a ligand-dependent but DNA binding-independent manner inhibits Pax6 transcriptional activity, resulting in inhibition of glucagon gene transcription. These data thereby define Pax6 as a novel functional target of PPARgamma and suggest that inhibition of glucagon gene expression may be among the multiple mechanisms through which thiazolidinediones improve glycemic control in diabetic subjects.