Pathological elevation of plasma fatty acids reduces insulin sensitivity. Although several regulation pathways have been reported, the molecular mechanisms of insulin sensitivity remain elusive, especially in skeletal muscle where most glucose is consumed. This study focuses on how two major dietary fatty acids affect insulin signaling in skeletal muscle cells. Palmitic acid (PA) not only reduced insulin-stimulated phosphorylation of Akt but also induced endoplasmic reticulum (ER) expansion and ER stress. Relieving ER stress using 4-phenyl butyric acid blocked PA-mediated protein kinase R-like ER kinase phosphorylation and ER expansion and reversed the inhibitory effect of PA on insulin-stimulated Akt phosphorylation. Importantly, oleic acid (OA) could also recover PA-reduced Akt phosphorylation and abolish both PA-mediated ER expansion and ER stress. The competition between these two fatty acids was further verified in rat skeletal muscle using venous fatty acid infusion. (3)H-labeled PA was converted mainly to active lipids (phospholipids and diacylglycerol) in the absence of OA, but to triacylglycerol in the presence of OA. Subcellular triacylglycerol and adipocyte differentiation-related protein from PA-treated cells cofractionated with the ER in the absence of OA but switched to the low-density fraction in the presence of OA. Taken together, these data suggest that the PA-mediated lipid composition and localization may cause ER expansion and consequently cause ER stress and insulin resistance in skeletal muscle.