Both rosiglitazone and metformin increase hepatic insulin sensitivity, but their mechanism of action has not been compared in humans. The objective of this study was to compare the effects of rosiglitazone and metformin treatment on liver fat content, hepatic insulin sensitivity, insulin clearance, and gene expression in adipose tissue and serum adiponectin concentrations in type 2 diabetes. A total of 20 drug-naive patients with type 2 diabetes (age 48 ± 3 years, fasting plasma glucose 152 ± 9 mg/dl, BMI 30.6 ± 0.8 kg/m²) were treated in a double-blind randomized fashion with either 8 mg rosiglitazone or 2 g metformin for 16 weeks. Both drugs similarly decreased HbA_1c, insulin, and free fatty acid concentrations. Body weight decreased in the metformin (84 ± 4 vs. 82 ± 4 kg, P < 0.05) but not the rosiglitazone group. Liver fat (proton spectroscopy) was decreased with rosiglitazone by 51% (15 ± 3 vs. 7 ± 1%, 0 vs. 16 weeks, P = 0.003) but not by metformin (13 ± 3 to 14 ± 3%, NS). Rosiglitazone (16 ± 2 vs. 20 ± 1 ml · kg⁻¹ · min⁻¹, P = 0.02) but not metformin increased insulin clearance by 20%. Hepatic insulin sensitivity in the basal state increased similarly in both groups. Insulin-stimulated glucose uptake increased significantly with rosiglitazone but not with metformin. Serum adiponectin concentrations increased by 123% with rosiglitazone but remained unchanged during metformin treatment. The decrease of serum adiponectin concentrations correlated with the decrease in liver fat (r = −0.74, P < 0.001). Rosiglitazone but not metformin significantly increased expression of peroxisome proliferator–activated receptor-γ, adiponectin, and lipoprotein lipase in adipose tissue. In conclusion, rosiglitazone but not metformin decreases liver fat and increases insulin clearance. The decrease in liver fat by rosiglitazone is associated with an increase in serum adiponectin concentrations. Both agents increase hepatic insulin sensitivity, but only rosiglitazone increases peripheral glucose uptake.