Increased glucose production is a hallmark of type 2 diabetes and alterations in lipid metabolism have a causative role in its pathophysiology. Here we postulate that physiological increments in plasma fatty acids can be sensed within the hypothalamus and that this sensing is required to balance their direct stimulatory action on hepatic gluconeogenesis. In the presence of physiologically-relevant increases in the levels of plasma fatty acids, negating their central action on hepatic glucose fluxes through (i) inhibition of the hypothalamic esterification of fatty acids, (ii) genetic deletion (Sur1-deficient mice) of hypothalamic K_ATP channels or pharmacological blockade (K_ATP blocker) of their activation by fatty acids, or (iii) surgical resection of the hepatic branch of the vagus nerve led to a marked increase in liver glucose production. These findings indicate that a physiological elevation in circulating lipids can be sensed within the hypothalamus and that a defect in hypothalamic lipid sensing disrupts glucose homeostasis.