We examined the hypothesis that an excess accumulation of intramuscular lipid (IMCL) is associated with insulin resistance and that this may be mediated by the oxidative capacity of muscle. Nine sedentary lean (L) and 11 obese (O) subjects, 8 obese subjects with type 2 diabetes mellitus (D), and 9 lean, exercise-trained (T) subjects volunteered for this study. Insulin sensitivity (M) determined during a hyperinsulinemic (40 mU·m⁻²min⁻¹) euglycemic clamp was greater (P < 0.01) in L and T, compared with O and D (9.45 ± 0.59 and 10.26 ± 0.78 vs. 5.51 ± 0.61 and 1.15 ± 0.83 mg·min⁻¹kg fat free mass⁻¹, respectively). IMCL in percutaneous vastus lateralis biopsy specimens by quantitative image analysis of Oil Red O staining was approximately 2-fold higher in D than in L (3.04 ± 0.39 vs. 1.40 ± 0.28% area as lipid; P < 0.01). IMCL was also higher in T (2.36 ± 0.37), compared with L (P < 0.01). The oxidative capacity of muscle determined with succinate dehydrogenase staining of muscle fibers was higher in T, compared with L, O, and D (50.0 ± 4.4, 36.1 ± 4.4, 29.7 ± 3.8, and 33.4 ± 4.7 optical density units, respectively; P < 0.01). IMCL was negatively associated with M (r = −0.57, P < 0.05) when endurance-trained subjects were excluded from the analysis, and this association was independent of body mass index. However, the relationship between IMCL and M was not significant when trained individuals were included. There was a positive association between the oxidative capacity and M among nondiabetics (r = 0.37, P < 0.05). In summary, skeletal muscle of trained endurance athletes is markedly insulin sensitive and has a high oxidative capacity, despite having an elevated lipid content. In conclusion, the capacity for lipid oxidation may be an important mediator of the association between excess muscle lipid accumulation and insulin resistance.