AIMS/HYPOTHESIS: Circulating levels of adiponectin are negatively associated with multiple indices of insulin resistance, and the concentration is reduced in humans with insulin resistance and type 2 diabetes. However, the mechanisms by which adiponectin improves insulin sensitivity remain unclear. SUBJECTS AND METHODS: Combining euglycaemic-hyperinsulinaemic clamp studies with indirect calorimetry and skeletal muscle biopsies, we examined the relationship between plasma adiponectin and parameters of whole-body glucose and lipid metabolism, and muscle glycogen synthase (GS) activity in 51 Caucasians (ten lean, 21 obese and 20 with type 2 diabetes). RESULTS: Plasma adiponectin was significantly reduced in type 2 diabetic compared with obese and lean subjects. In lean and obese subjects, insulin significantly reduced plasma adiponectin, but this response was blunted in patients with type 2 diabetes. Plasma adiponectin was positively associated with insulin-stimulated glucose disposal (r = 0.48), glucose oxidation (r = 0.54), respiratory quotient (r = 0.58) and non-oxidative glucose metabolism (r = 0.38), and negatively associated with lipid oxidation during insulin stimulation (r = -0.60) after adjustment for body fat (all p < 0.01). Most notably, we found a positive association between plasma adiponectin and insulin stimulation of GS activity in skeletal muscle (r = 0.44, p < 0.01). CONCLUSIONS/INTERPRETATION: Our results indicate that plasma adiponectin may enhance insulin sensitivity by improving the capacity to switch from lipid to glucose oxidation and to store glucose as glycogen in response to insulin, and that low adiponectin may contribute to impaired insulin activation of GS in skeletal muscle of patients with type 2 diabetes.