Activation of peroxisome proliferator-activated receptor gamma (PPARgamma) by thiazolidinediones (TZDs) improves insulin resistance by increasing insulin-stimulated glucose disposal in skeletal muscle. It remains debatable whether the effect of TZDs on muscle is direct or indirect via adipose tissue. We therefore generated mice with muscle-specific PPARgamma knockout (MuPPARgammaKO) using Cre/loxP recombination. Interestingly, MuPPARgammaKO mice developed excess adiposity despite reduced dietary intake. Although insulin-stimulated glucose uptake in muscle was not impaired, MuPPARgammaKO mice had whole-body insulin resistance with a 36% reduction (P < 0.05) in the glucose infusion rate required to maintain euglycemia during hyperinsulinemic clamp, primarily due to dramatic impairment in hepatic insulin action. When placed on a high-fat diet, MuPPARgammaKO mice developed hyperinsulinemia and impaired glucose homeostasis identical to controls. Simultaneous treatment with TZD ameliorated these high fat-induced defects in MuPPARgammaKO mice to a degree identical to controls. There was also altered expression of several lipid metabolism genes in the muscle of MuPPARgammaKO mice. Thus, muscle PPARgamma is not required for the antidiabetic effects of TZDs, but has a hitherto unsuspected role for maintenance of normal adiposity, whole-body insulin sensitivity, and hepatic insulin action. The tissue crosstalk mediating these effects is perhaps due to altered lipid metabolism in muscle.