Metformin is a widely used drug for treatment of type 2 diabetes with no defined cellular mechanism of action. Its glucose-lowering effect results from decreased hepatic glucose production and increased glucose utilization. Metformin's beneficial effects on circulating lipids have been linked to reduced fatty liver. AMP-activated protein kinase (AMPK) is a major cellular regulator of lipid and glucose metabolism. Here we report that metformin activates AMPK in hepatocytes; as a result, acetyl-CoA carboxylase (ACC) activity is reduced, fatty acid oxidation is induced, and expression of lipogenic enzymes is suppressed. Activation of AMPK by metformin or an adenosine analogue suppresses expression of SREBP-1, a key lipogenic transcription factor. In metformin-treated rats, hepatic expression of SREBP-1 (and other lipogenic) mRNAs and protein is reduced; activity of the AMPK target, ACC, is also reduced. Using a novel AMPK inhibitor, we find that AMPK activation is required for metformin's inhibitory effect on glucose production by hepatocytes. In isolated rat skeletal muscles, metformin stimulates glucose uptake coincident with AMPK activation. Activation of AMPK provides a unified explanation for the pleiotropic beneficial effects of this drug; these results also suggest that alternative means of modulating AMPK should be useful for the treatment of metabolic disorders.