We demonstrated previously that high physiological concentrations of free fatty acids (FFA) rapidly decrease insulin binding, degradation, and action in isolated rat hepatocytes. In this study, hepatocytes from lean and obese Sprague-Dawley rats (Alab, Stockholm) were preincubated with or without 0.4 mM oleic acid, and the effect on insulin binding and tyrosine kinase activity was measured. In the absence of exogenous FFA, insulin binding was reduced in hepatocytes from obese compared with lean rats (mean ± SE reduction 44 ±7%, n = 8, P < 0.01). Furthermore, the inhibitory effect of oleic acid added to hepatocytes from lean rats (n = 8; 40 ± 9%, P < 0.01) was not seen in cells from obese rats. Treating obese rats with Etomoxir, a carnitine palmitoyl transferase I inhibitor, increased insulin binding to isolated hepatocytes by 41 ± 13% (n = 5, P < 0.05). There was no difference in total binding to partially purified insulin receptors from solubilized hepatocytes from lean and obese rats, whether cells were or were not preincubated with oleic acid. Tyrosine kinase activity of partially purified receptors from basal or insulin-stimulated cells was not affected by either obesity, treatment with Etomoxir, or preincubating the cells with oleic acid. Thus, both obesity and elevated ambient FFA levels are associated with impaired insulin cell surface binding to isolated hepatocytes, possibly through an effect of lipid oxidation on the internalization/recycling of the insulin-receptor complex without any perturbation of the receptor tyrosine kinase activity. The data suggest that the reduced insulin binding to hepatocytes from obese rats is due to elevated ambient FFA levels.