Insulin resistance is a condition of central importance in a cluster of clinical disorders including diabetes mellitus, hypertension, dyslipidemia, central obesity and coronary heart disease. Despite its association with numerous health problems, the mechanism responsible for the development of this phenomenon remains to be established. A novel theory has proposed that insulin resistance in diabetes stems, at least in part, from enhanced free fatty acid (FFA) oxidation and/or excessive production of glucocorticoids (GCs). Several key predictions of this premise were subjected to experimental testing using streptozotocin (STZ)-treated rats as a model for insulin-dependent diabetes mellitus and euglycemic-hyperinsulinemic clamp technique for the in vivo measurement of insulin actions. Euglycemic clamp studies with an insulin infusion index of 5 mU/kg/min were used to measure endogenous glucose production (EGP), glucose infusion rate (GIR), glucose disposal rate (GDR) and skeletal muscle glucose utilization index (GUI). Post-absorptive basal EGP and plasma levels of glucose and free fatty acids (FFA) were elevated in the STZ diabetic rats compared to their corresponding control values. In contrast, hypoinsulinemia was evident in these animals. Steady-state GIR and GDR during euglycemic-hyperinsulinemic clamp were markedly decreased in the STZ diabetic rats. Similarly, insulin-mediated suppression of EGP and plasma FFA concentration was also impaired in these animals. GUI, a measure of 2-deoxyglucose (2-DG) uptake, was increased in response to insulin in the order of white gastrocnemus (WG), red gastrocnemus (RG), extensor digitorum longus and soleus muscles. This parallels the percentage of red fibers in these muscles. Diabetes interferes with insulin's ability to increase 2-DG uptake in all of the above muscles with the exception of WG. Nullification of the associated hyperlipidemic and hypercortisolemic states of diabetes with etomoxir (hyperlipidemic) and the glucocorticoid receptor blocker RU-486 (hypercortisolemic) ameliorated the diabetes-related impairment of the in vivo insulin action. Overall these results together with those garnered from the literature support the notion that hypercortisolemia and the enhancement of FFA oxidation are involved, at least in part, in the development of hepatic and skeletal muscle insulin resistance in poorly controlled type I diabetes.