Recent studies have demonstrated that fatty acids induce insulin resistance in skeletal muscle by blocking insulin activation of insulin receptor substrate-1 (IRS-1)-associated phosphatidylinositol 3-kinase (PI3-kinase). To examine the mechanism by which fatty acids mediate this effect, rats were infused with either a lipid emulsion (consisting mostly of 18:2 fatty acids) or glycerol. Intracellular C18:2 CoA increased in a time-dependent fashion, reaching an approximately 6-fold elevation by 5 h, whereas there was no change in the concentration of any other fatty acyl-CoAs. Diacylglycerol (DAG) also increased transiently after 3-4 h of lipid infusion. In contrast there was no increase in intracellular ceramide or triglyceride concentrations during the lipid infusion. Increases in intracellular C18:2 CoA and DAG concentration were associated with protein kinase C (PKC)-theta activation and a reduction in both insulin-stimulated IRS-1 tyrosine phosphorylation and IRS-1 associated PI3-kinase activity, which were associated with an increase in IRS-1 Ser(307) phosphorylation. These data support the hypothesis that an increase in plasma fatty acid concentration results in an increase in intracellular fatty acyl-CoA and DAG concentrations, which results in activation of PKC-theta leading to increased IRS-1 Ser(307) phosphorylation. This in turn leads to decreased IRS-1 tyrosine phosphorylation and decreased activation of IRS-1-associated PI3-kinase activity resulting in decreased insulin-stimulated glucose transport activity.