Thiazolidinediones (TZD) function as potent anti-diabetic drugs through their direct action on the nuclear receptor peroxisome proliferator-activated receptor γ (PPARγ), but their therapeutic benefits are compromised by severe side effects. To address this concern, here we developed a potent "hit" compound, VSP-51, which is a novel selective PPARγ-modulating ligand with improved therapeutic profiles in vitro compared to the multi-billion dollar TZD drug rosiglitazone (Rosi). Unlike Rosi, VSP-51 is a partial agonist of PPARγ with improved insulin sensitivity due to its ability to bind PPARγ with high affinity without stimulating adipocyte differentiation and the expression of adipogenesis-related genes. We have determined the crystal structure of the PPARγ ligand-binding domain (LBD) in complex with VSP-51, which revealed a unique mode of binding for VSP-51 and provides the molecular basis for the discrimination between VSP-51 from TZDs and other ligands such as telmisartan, SR1663 and SR1664. Taken together, our findings demonstrate that: a) VSP-51 can serve as a promising candidate for anti-diabetic drug discovery; and b) provide a rational basis for the development of future pharmacological agents targeting PPARγ with advantages over current TZD drugs.