To examine the mechanism by which free fatty acids (FFAs) induce insulin resistance in vivo, awake chronically catheterized rats underwent a hyperinsulinemic-euglycemic clamp with or without a 5-h preinfusion of lipid/heparin to raise plasma FFA concentrations. Increased plasma FFAs resulted in insulin resistance as reflected by a approximately 35% reduction in the glucose infusion rate (P < 0.05 vs. control). The insulin resistance was associated with a 40-50% reduction in 13C nuclear magnetic resonance (NMR)-determined rates of muscle glycogen synthesis (P < 0.01 vs. control) and muscle glucose oxidation (P < 0.01 vs. control), which in turn could be attributed to a approximately 25% reduction in glucose transport activity as assessed by 2-[1,2-3H]deoxyglucose uptake in vivo (P < 0.05 vs. control). This lipid-induced decrease in insulin-stimulated muscle glucose metabolism was associated with 1) a approximately 50% reduction in insulin-stimulated insulin receptor substrate (IRS)-1-associated phosphatidylinositol (PI) 3-kinase activity (P < 0.05 vs. control), 2) a blunting in insulin-stimulated IRS-1 tyrosine phosphorylation (P < 0.05, lipid-infused versus glycerol-infused), and 3) a four-fold increase in membrane-bound, or active, protein kinase C (PKC) theta (P < 0.05 vs. control). We conclude that acute elevations of plasma FFA levels for 5 h induce skeletal muscle insulin resistance in vivo via a reduction in insulin-stimulated muscle glycogen synthesis and glucose oxidation that can be attributed to reduced glucose transport activity. These changes are associated with abnormalities in the insulin signaling cascade and may be mediated by FFA activation of PKC theta.