OBJECTIVE: To determine mechanisms by which pioglitazone and metformin effect hepatic and extra-hepatic insulin action. RESEARCH DESIGN AND METHODS: Thirty-one subjects with type 2 diabetes were randomly assigned to pioglitazone (45 mg) or metformin (2,000 mg) for 4 months. RESULTS: Glucose was clamped before and after therapy at approximately 5 mmol/l, insulin raised to approximately 180 pmol/l, C-peptide suppressed with somatostatin, glucagon replaced at approximately 75 pg/ml, and glycerol maintained at approximately 200 mmol/l to ensure comparable and equal portal concentrations on all occasions. Insulin-induced stimulation of glucose disappearance did not differ before and after treatment with either pioglitazone (23 +/- 3 vs. 24 +/- 2 micromol x kg(-1) x min(-1)) or metformin (22 +/- 2 vs. 24 +/- 3 micromol x kg(-1) x min(-1)). In contrast, pioglitazone enhanced (P < 0.01) insulin-induced suppression of both glucose production (6.0 +/- 1.0 vs. 0.2 +/- 1.6 micromol x kg(-1) x min(-1)) and gluconeogenesis (n = 11; 4.5 +/- 0.9 vs. 0.8 +/- 1.2 micromol x kg(-1) x min(-1)). Metformin did not alter either suppression of glucose production (5.8 +/- 1.0 vs. 5.0 +/- 0.8 micromol x kg(-1) x min(-1)) or gluconeogenesis (n = 9; 3.7 +/- 0.8 vs. 2.6 +/- 0.7 micromol x kg(-1) x min(-1)). Insulin-induced suppression of free fatty acids was greater (P < 0.05) after treatment with pioglitazone (0.14 +/- 0.03 vs. 0.06 +/- 0.01 mmol/l) but unchanged with metformin (0.12 +/- 0.03 vs. 0.15 +/- 0.07 mmol/l). CONCLUSIONS: Thus, relative to metformin, pioglitazone improves hepatic insulin action in people with type 2 diabetes, partly by enhancing insulin-induced suppression of gluconeogenesis. On the other hand, both drugs have comparable effects on insulin-induced stimulation of glucose uptake.