Type 2 diabetes results from impaired action and secretion of insulin. It is not known whether the two defects share a common pathogenesis. We show that haploinsufficiency of the Foxo1 gene, encoding a forkhead transcription factor (forkhead box transcription factor O1), restores insulin sensitivity and rescues the diabetic phenotype in insulin-resistant mice by reducing hepatic expression of glucogenetic genes and increasing adipocyte expression of insulin-sensitizing genes. Conversely, a gain-of-function Foxo1 mutation targeted to liver and pancreatic beta-cells results in diabetes arising from a combination of increased hepatic glucose production and impaired beta-cell compensation due to decreased Pdx1 expression. These data indicate that Foxo1 is a negative regulator of insulin sensitivity in liver, adipocytes and pancreatic beta-cells. Impaired insulin signaling to Foxo1 provides a unifying mechanism for the common metabolic abnormalities of type 2 diabetes.NOTE: In the AOP version of this article, the name of the fourth author was misspelled as W K Cavanee rather than the correct spelling: W K Cavenee. This has been corrected in the full-text online version of the article. The name will appear correctly in the print version.