The effects of free fatty acids (FFA) on insulin receptor binding and processing (internalization, degradation, dissociation, and release) were examined in hepatocytes isolated from 12-week-old female rats. Animals were fasted for 24 h to deplete liver glycogen and lipid content. Cells were preincubated for 30 min or 3 h at 37 degrees C in media containing 10 mM lactate, 1 mM pyruvate, and 3.5 percent albumin with increasing concentrations of palmitate (0.00, 0.05, 0.2, 0.5, 1.0 and 2.0 mM). Under these conditions palmitate is the primary substrate for cellular metabolism, and its major fate is oxidation. Equilibrium binding was determined after 18-20 h of incubation at 4 degrees C with radiolabeled insulin and increasing concentrations of unlabeled hormone. With increasing palmitate concentration, a dose-dependent decline in cell-surface insulin receptor binding was observed. Binding decreased by 35 percent and 44 percent after 30 min and 3 h of preincubation with 2 mM palmitate, respectively. This decrease was due to a reduction in insulin receptor number. Receptor-mediated insulin processing was evaluated in cells prelabeled at 4 degrees C with 125I (A14)-monoiodoinsulin at an insulin concentration of 100 pM and reincubated at 37 degrees C for up to 30 min. The amount of internalized insulin was decreased by preincubation of hepatocytes with palmitate. This decrease was proportional to the reduction in cell-surface insulin receptor density at palmitate concentrations of 0.05-0.5 mM, but was disproportionally greater at higher fatty acid concentrations. Receptor-mediated insulin degradation decreased at palmitate concentrations between 0.05 and 1.0 mM. At 2 mM, however, insulin degradation was enhanced. This enhancement was observed after 30 min or 3 h of exposure to the fatty acid. Dissociation and/or release of cell-associated internalized insulin was not influenced by the FFA exposure. The effects of FFA on hepatocyte insulin binding and processing were contingent upon cellular metabolism, since no changes were noted when cells were preincubated with palmitate at 4 degrees C under otherwise similar conditions. Thus the in vitro exposure of hepatocytes to FFA influences both receptor and postreceptor events mediating insulin metabolism. These effects may account for the altered hepatic insulin extraction and sensitivity that accompany abdominal obesity and its progression to diabetes.