Increased circulating free fatty acids (FFAs) inhibit both hepatic and peripheral insulin action. Because the loss of effectiveness of glucose to suppress endogenous glucose production and stimulate glucose uptake contributes importantly to fasting hyperglycemia in type 2 diabetes, we examined whether the approximate twofold elevations in FFA characteristic of poorly controlled type 2 diabetes contribute to this defect. Glucose levels were raised from 5 to 10 mmol/l while maintaining fixed hormonal conditions by infusing somatostatin with basal insulin, glucagon, and growth hormone. Each individual was studied at two FFA levels: with (NA+) and without (NA−) infusion of nicotinic acid in nine individuals with poorly controlled type 2 diabetes (HbA_1c = 10.1 ± 0.7%) and with (LIP+) and without (LIP−) infusion of lipid emulsion in nine nondiabetic individuals. Elevating FFA to ∼500 μmol/l blunted the ability of glucose to suppress endogenous glucose production (LIP− = −48% vs. LIP+ = −28%; P < 0.01) and increased glucose uptake (LIP− = 97% vs. LIP+ = 51%; P < 0.01) in nondiabetic individuals. Raising FFA also blunted the endogenous glucose production response in 10 individuals with type 2 diabetes in good control (HbA_1c = 6.3 ± 0.3%). Conversely, normalizing FFA nearly restored the endogenous glucose production (NA− = −7% vs. NA+ = −41%; P < 0.001) and glucose uptake (NA− = 26% vs. NA+ = 64%; P < 0.001) responses to hyperglycemia in individuals with poorly controlled type 2 diabetes. Thus, increased FFA levels contribute substantially to the loss of glucose effectiveness in poorly controlled type 2 diabetes.