Insulin resistance results in dysregulated hepatic gluconeogenesis that contributes to obesity-related hyperglycemia and progression of type 2 diabetes mellitus (T2DM). Recent studies show that MAPK phosphatase–3 (MKP-3) promotes gluconeogenic gene transcription in hepatoma cells, but little is known about the physiological role of MKP-3 in vivo. Here, we have shown that expression of MKP-3 is markedly increased in the liver of diet-induced obese mice. Consistent with this, adenovirus-mediated MKP-3 overexpression in lean mice promoted gluconeogenesis and increased fasting blood glucose levels. Conversely, shRNA knockdown of MKP-3 in both lean and obese mice resulted in decreased fasting blood glucose levels. In vitro experiments identified forkhead box O1 (FOXO1) as a substrate for MKP-3. MKP-3–mediated dephosphorylation of FOXO1 at Ser256 promoted its nuclear translocation and subsequent recruitment to the promoters of key gluconeogenic genes. In addition, we showed that PPARγ coactivator–1α (PGC-1α) acted downstream of FOXO1 to mediate MKP-3–induced gluconeogenesis. These data indicate that MKP-3 is an important regulator of hepatic gluconeogenesis in vivo and suggest that inhibition of MKP-3 activity may provide new therapies for T2DM.