Type 2 diabetes mellitus (T2DM) is characterized by defects in both insulin sensitivity and glucose-stimulated insulin secretion (GSIS) and is often accompanied by obesity. In this study, we show that disruption of thioredoxin binding protein-2 (TBP-2, also called Txnip) in obese mice (ob/ob) dramatically improves hyperglycaemia and glucose intolerance, without affecting obesity or adipocytokine concentrations. TBP-2-deficient ob/ob mice exhibited enhanced insulin sensitivity with activated insulin receptor substrate-1/Akt signalling in skeletal muscle and GSIS in islets compared with ob/ob mice. The elevation of uncoupling protein-2 (UCP-2) expression in ob/ob islets was downregulated by TBP-2 deficiency. TBP-2 overexpression suppressed glucose-induced adenosine triphosphate production, Ca(2+) influx and GSIS. In β-cells, TBP-2 enhanced the expression level and transcriptional activity of UCP-2 by recruitment of peroxisome proliferator-activated receptor-γ co-activator-1α to the UCP-2 promoter. Thus, TBP-2 is a key regulatory molecule of both insulin sensitivity and GSIS in diabetes, raising the possibility that inhibition of TBP-2 may be a novel therapeutic approach for T2DM.