Free fatty acids (FFAs) circulate round the body and represent important nutrients and the key oxidative fuel for the heart and resting skeletal muscle. In addition, FFAs are thought to be potent signalling molecules. Growing evidence indicates that FFAs may be involved in type 2 diabetes mellitus and obesity by mediating insulin resistance. In 1963, it was postulated that accumulated glucose-6-phosphate as a result of increased FFA oxidation leads to decreased glucose uptake. An alternative hypothesis is that increased concentrations of plasma FFA induce insulin resistance in humans through inhibition of glucose transport activity, which appears to be a consequence of decreased insulin receptor substrate-1-associated phosphatidyl inositol 3 kinase activity. Moreover, FFAs can arise locally, and increased intramyocellular and hepatocellular lipids have been shown to be associated with insulin resistance. This paper reviews the main aspects of FFA metabolism in the development of insulin resistance in skeletal muscle and liver, as well as the role of ectopic lipid deposits as a local source of FFAs. Finally, the role of thiazolidinediones as modulators of FFA-induced insulin resistance will be discussed.