Autophagy is a homeostatic process involved in the bulk degradation of cytoplasmic components, including damaged organelles and proteins. In both genetic and dietary models of obesity, we observed a severe downregulation of autophagy, particularly in Atg7 expression levels in liver. Suppression of Atg7 both in vitro and in vivo resulted in defective insulin signaling and elevated ER stress. In contrast, restoration of the Atg7 expression in liver resulted in dampened ER stress, enhanced hepatic insulin action, and systemic glucose tolerance in obese mice. The beneficial action of Atg7 restoration in obese mice could be completely prevented by blocking a downstream mediator, Atg5, supporting its dependence on autophagy in regulating insulin action. Our data demonstrate that autophagy is an important regulator of organelle function and insulin signaling and that loss of autophagy is a critical component of defective insulin action seen in obesity.