Human type 2 diabetes is characterized by defects in both insulin action and insulin secretion. It has been difficult to identify a single molecular abnormality underlying these features. Insulin-receptor substrates (IRS proteins) may be involved in type 2 diabetes: they mediate pleiotropic signals initiated by receptors for insulin and other cytokines. Disruption of IRS-1 in mice retards growth, but diabetes does not develop because insulin secretion increases to compensate for the mild resistance to insulin. Here we show that disruption of IRS-2 impairs both peripheral insulin signalling and pancreatic beta-cell function. IRS-2-deficient mice show progressive deterioration of glucose homeostasis because of insulin resistance in the liver and skeletal muscle and a lack of beta-cell compensation for this insulin resistance. Our results indicate that dysfunction of IRS-2 may contribute to the pathophysiology of human type 2 diabetes.