The associations between obesity, insulin resistance, and type 2 diabetes mellitus are well documented. Free fatty acids (FFA), which are often elevated in obesity, have been implicated as an important link in these associations. Contrary to muscle glucose metabolism, the effects of FFA on hepatic glucose metabolism and the associated mechanisms have not been extensively investigated. It is still controversial whether FFA have substantial effects on hepatic glucose production, and the mechanisms responsible for these putative effects remain unknown. We review recent progress in this area and try to clarify controversial issues regarding the mechanisms responsible for the FFA-induced increase in hepatic glucose production in the postabsorptive state and during hyperinsulinemia.