Patients with diabetes suffer disproportionately from impaired lipid metabolism and cardiovascular disease, but the relevant roles of insulin resistance and hyperglycemia in these processes are unclear. Transcription factor FoxO1 is regulated dually by insulin and nutrients. In this study, we addressed the hypothesis that, in addition to its established role to regulate hepatic glucose production, FoxO1 controls aspects of lipid metabolism in the diabetic liver. Mice with a liver-specific deletion of FoxO1 (L-FoxO1) and their control littermates were rendered hyperglycemic by streptozotocin administration. Subsequently, we monitored serum lipids, liver VLDL secretion, and hepatic expression of genes related to lipid metabolism. Hepatic FoxO1 ablation resulted in increased VLDL secretion, increased cholesterol, and increased plasma free fatty acids, three hallmarks of the diabetic state. l-FoxO1 mice expressed increased levels of SREBP-2 and FGF21 without affecting lipogenic genes. We propose that FoxO1 fine tunes lipolysis through its actions on FGF21 and that hepatic FoxO1 ablation increases availability of substrates for hepatic triglyceride and cholesterol synthesis and VLDL secretion. The implications of these findings are that FoxO1 protects against excessive hepatic lipid production during hyperglycemia and that its inhibition by intensive insulin treatment may exacerbate paradoxically the lipid abnormalities of diabetes.