Acute exercise can reverse muscle insulin resistance, but the mechanism(s) of action are unknown. With the use of a hindlimb perfusion model, we have found that acute contraction restores insulin-stimulated glucose uptake in muscle of obese Zucker rats to levels witnessed in lean controls. Previous reports have suggested that obesity-related insulin resistance stems from lipid oversupply and tissue accumulation of toxic lipid intermediates that impair insulin signaling. We reasoned that contraction might activate hydrolysis and oxidation of intramuscular lipids, thus alleviating "lipotoxicity" and priming the muscle for enhanced insulin action. Indeed, analysis of mitochondrial-derived acyl-carnitine esters suggested that contraction caused robust increases in beta-oxidative flux and mitochondrial oxidation. As predicted, contraction decreased intramuscular triacylglycerol content; however, diacylglycerol and long chain acyl-CoAs, lipid intermediates presumed to trigger insulin resistance, were either unchanged or increased. In muscles from obese animals, insulin-stimulated tyrosine phosphorylation of the insulin receptor and insulin receptor substrate-1 remained impaired after contraction, whereas phosphorylation of the downstream signaling protein, AS160, was partially restored. These results suggest that acute exercise enables diabetic muscle to circumvent upstream defects in insulin signal transduction via mechanisms that are more tightly coupled to increased mitochondrial energy metabolism than the lowering of diacylglycerol and long chain acyl-CoA.