The liver constitutes a key organ in systemic metabolism, contributing substantially to the development of insulin resistance and type 2 diabetes mellitus (T2DM). The mechanisms underlying these processes are not entirely understood, but involve hepatic fat accumulation, alterations of energy metabolism and inflammatory signals derived from various cell types including immune cells. Lipotoxins, mitochondrial function, cytokines and adipocytokines have been proposed to play a major part in both NAFLD and T2DM. Patients with NAFLD are commonly insulin resistant. On the other hand, a large number of patients with T2DM develop NAFLD with its inflammatory complication, NASH. The high incidence of NASH in patients with T2DM leads to further complications, such as liver cirrhosis and hepatocellular carcinoma, which are increasingly recognized. Therapeutic concepts such as thiazolidinediones (glitazones) for treating T2DM also show some efficacy in the treatment of NASH. This Review will describe the multifaceted and complex interactions between the liver and T2DM.