Thiazolidinediones lower lipids, but it is unclear whether this is essential for their insulin-sensitizing action. We investigated relationships between lipid-lowering and insulin-sensitizing actions of a thiazolidinedione. Normal rats were pretreated with or without Pioglitazone (Pio, 3 mg/kg.d) for 2 wk. Insulin sensitivity was assessed by hyperinsulinemic-euglycemic clamp with elevation of free fatty acids (FFA) by Intralipid/heparin infusion over 6 h. In untreated rats insulin sensitivity decreased by 46% over 3-6 h of elevated FFA, whereas it remained normal but with a 50% increase in FFA clearance in Pio-treated rats. After matching plasma FFA, insulin sensitivity was still partially (30%) protected in Pio-treated rats, substantially by maintaining insulin suppressibility of hepatic glucose output. This was associated with lower hepatic long-chain acyl-coenzyme A. Plasma adiponectin was increased 2-fold in Pio-treated rats and was negatively correlated with hepatic glucose output (r2 = 0.70, P < 0.001) and liver long-chain acyl-coenzyme A (r2 = 0.39, P < 0.005). Pio-induced muscle insulin sensitization was largely diminished after matching plasma FFA elevation, but insulin-stimulated protein kinase B phosphorylation was protected. We conclude that thiazolidinediones can protect against lipid-induced insulin resistance with a significant component (mainly liver) of the protective effect not requiring lipid lowering. This may be related to chronic elevation of adiponectin by thiazolidinediones.