Fatty acid synthesis and fatty acid oxidation were examined in rat hepatocytes under a variety of experimental conditions. In cells from fed animals, glucagon acutely switched the direction of fatty acid metabolism from synthesis to oxidation. Addition of lactate plus pyruvate had the opposite effect. The inhibitory action of glucagon on fatty acid synthesis and its stimulatory effect on fatty acid oxidation were largely, but not completely, offset by the simultaneous addition of lactate plus pyruvate. Changes in cellular citrate and malonyl-CoA levels indicated that glucagon exerted its inhibitory effect on fatty acid synthesis at two levels: (i) blockade of glycolysis; and (ii) partial inhibition of a more distal step, probably acetyl-CoA carboxylase. Under all conditions, fatty acid oxidation was related in a linear and reciprocal fashion to the rate of fatty acid synthesis and the tissue malonyl-CoA content. The latter fluctuated through a range of 1 to 6 nmol per g wet weight of cells. Since malonyl-CoA inhibits carnitine acyltransferase I of liver mitochondria with a Ki in the region of 1 to 2 micron, the present studies support the concept that this compound plays a pivotal role in the coordination of hepatic fatty acid synthesis and oxidation. The ketogenic effect of glucagon on liver appears to be manifested in large part through the ability of the hormone to reduce the tissue malonyl-CoA concentration.