GPR40 (FFA1) is a fatty acid receptor whose activation results in potent glucose lowering and insulinotropic effects in vivo. Several reports illustrate that GPR40 agonists exert glucose lowering in diabetic humans. To assess the mechanisms by which GPR40 partial agonists improve glucose homeostasis, we evaluated the effects of MK-2305, a potent and selective partial GPR40 agonist, in diabetic Goto Kakizaki rats. MK-2305 decreased fasting glucose after acute and chronic treatment. MK-2305-mediated changes in glucose were coupled with increases in plasma insulin during hyperglycemia and glucose challenges but not during fasting, when glucose was normalized. To determine the mechanism(s) mediating these changes in glucose metabolism, we measured the absolute contribution of precursors to glucose production in the presence or absence of MK-2305. MK-2305 treatment resulted in decreased endogenous glucose production (EGP) driven primarily through changes in gluconeogenesis from substrates entering at the TCA cycle. The decrease in EGP was not likely due to a direct effect on the liver, as isolated perfused liver studies showed no effect of MK-2305 ex vivo and GPR40 is not expressed in the liver. Taken together, our results suggest MK-2305 treatment increases glucose stimulated insulin secretion (GSIS), resulting in changes to hepatic substrate handling that improve glucose homeostasis in the diabetic state. Importantly, these data extend our understanding of the underlying mechanisms by which GPR40 partial agonists reduce hyperglycemia.