Tumor necrosis factor (TNF)-alpha plays a central role in the state of insulin resistance associated with obesity. It has previously been shown that one important mechanism by which TNF-alpha interferes with insulin signaling is through the serine phosphorylation of insulin receptor substrate-1 (IRS-1), which can then function as an inhibitor of the tyrosine kinase activity of the insulin receptor (IR). However, the receptors and the signaling pathway used by TNF-alpha that mediate the inhibition of IR activity are unknown. We show here that human TNF-alpha, which binds only to the murine p55 TNF receptor (TNFR), is as effective at inhibiting insulin-dependent tyrosine phosphorylation of IR and IRS-1 in adipocytes and myeloid 32D cells as murine TNF-alpha, which binds to both p55 TNFR and p75 TNFR. Likewise, antibodies that are specific agonists for p55 TNFR or p75 TNFR demonstrate that stimulation of p55 TNFR is sufficient to inhibit insulin signaling, though a small effect can also be seen with antibodies to p75 TNFR. Exogenous sphingomyelinase and ceramides, known to be formed by activation of p55 TNFR, inhibit IR and IRS-1 tyrosine phosphorylation and convert IRS-1 into an inhibitor of IR tyrosine kinase in vitro. Myeloid 32D cells expressing IR and IRS-1 are sensitive to this inhibition, but cells expressing IR and IRS-2 are resistant, pointing to an important difference in the biological function between IRS-1 and IRS-2. These data strongly suggest that TNF-alpha inhibits insulin signaling via stimulation of p55 TNFR and sphingomyelinase activity, which results in the production of an inhibitory form of IRS-1.