Peroxisome proliferator-activated receptor γ (PPARγ) is a nuclear receptor that plays a pivotal role in obesity and diabetes. PPARγ has two isoforms, PPARγ1 and PPARγ2. We investigated the functional differences between PPARγ1 and PPARγ2 by selectively disrupting PPARγ2 in mice. In contrast to the embryonic lethality of PPARγ-deficient mice, PPARγ2^-/- mice survived. Although normal development was identified in other tissues we examined, PPARγ2^-/- mice exhibited an overall reduction in white adipose tissue, less lipid accumulation, and decreased expression of adipogenic genes in adipose tissue. In addition, insulin sensitivity was impaired in male PPARγ2^-/- mice, with dramatically decreased expression of insulin receptor substrate 1 and glucose transporter 4 in the skeletal muscle, but thiazolidinediones were able to normalize this insulin resistance. Consistent with in vivo data, PPARγ2^-/- mouse embryonic fibroblasts showed a dramatically reduced capacity for adipogenesis in vitro compared with wild-type mouse embryonic fibroblasts. Taken together, our data demonstrate that PPARγ2 deficiency impairs the development of adipose tissue and insulin sensitivity. PPARγ2^-/- mice may provide a tool to study the role of PPARγ2 in obesity and diabetes.