Peroxisome proliferator-activated receptor (PPAR)-γ is a transcription factor with a key role in adipocyte differentiation. The Ala allele of the common Pro12Ala polymorphism in the isoform PPAR-γ2 is associated with reduced risk for type 2 diabetes. The effect on the individual is weak, but because of a prevalence of >75% of the high-risk Pro allele, the population-attributable risk is enormous. The in vivo effects of the polymorphism are secondary to alterations in adipose tissue, where PPAR-γ2 is predominantly expressed. Moderate reduction in transcriptional activity of PPAR-γ as a result of the polymorphism modulates production and release of adipose-derived factors. Both decreased release of insulin-desensitizing free fatty acids, tumor necrosis factor-α, and resistin and increased release of the insulin-sensitizing hormone adiponectin result in secondary improvement of insulin sensitivity of glucose uptake and suppression of glucose production. The population effect of this polymorphism may be modulated by environmental or genetic factors such as obesity, ethnicity, ratio of unsaturated to saturated fatty acids, and genetic background. Once diabetes has developed, the protective effect of the Ala allele may be lost, since increased vascular complications and more pronounced β-cell dysfunction have been reported. These observations, however, are currently unexplained. In conclusion, the Pro12Ala polymorphism in PPAR-γ2 represents the first genetic variant with a broad impact on the risk of common type 2 diabetes. The precise understanding of its mechanism may lead to novel diagnostic, preventive, and therapeutic approaches for improving the management of type 2 diabetes.