Myostatin, a member of the transforming growth factor (TGF)-β superfamily, plays a potent inhibitory role in regulating skeletal muscle mass. Inhibition of myostatin by gene disruption, transgenic (Tg) expression of myostatin propeptide, or injection of propeptide or myostatin antibodies causes a widespread increase in skeletal muscle mass. Several peptides, in addition to myostatin propeptide and myostatin antibodies, can bind directly to and neutralize the activity of myostatin. These include follistatin and follistatin-related gene. Overexpression of follistatin or follistatin-related gene in mice increased the muscle mass as in myostatin knockout mice. Follistatin binds to myostatin but also binds to and inhibits other members of the TGF-β superfamily, notably activins. Therefore, follistatin regulates both myostatin and activins in vivo. We previously reported the development and characterization of several follistatin-derived peptides, including FS I-I (Nakatani M, Takehara Y, Sugino H, Matsumoto M, Hashimoto O, Hasegawa Y, Murakami T, Uezumi A, Takeda S, Noji S, Sunada Y, Tsuchida K. FASEB J 22: 477-487, 2008). FS I-I retained myostatin-inhibitory activity without affecting the bioactivity of activins. Here, we found that inhibition of myostatin increases skeletal muscle mass and decreases fat accumulation in FS I-I Tg mice. FS I-I Tg mice also showed decreased fat accumulation even on a control diet. Interestingly, the adipocytes in FS I-I Tg mice were much smaller than those of wild-type mice. Furthermore, FS I-I Tg mice were resistant to high-fat diet-induced obesity and hepatic steatosis and had lower hepatic fatty acid levels and altered fatty acid composition compared with control mice. FS I-I Tg mice have improved glucose tolerance when placed on a high-fat diet. These data indicate that inhibiting myostatin with a follistatin-derived peptide provides a novel therapeutic option to decrease adipocyte size, prevent obesity and hepatic steatosis, and improve glucose tolerance.