Expression of peroxisome proliferator-activated receptor alpha (PPARalpha) and enzymes of fatty acid (FA) oxidation is markedly reduced in the fat-laden, dysfunctional islets of obese, prediabetic Zucker diabetic fatty (fa/fa) rats with mutated leptin receptors (OB-R). Leptin, PPARalpha/retinoid x receptor ligands, and FA all up-regulate PPARalpha and enzymes of FA oxidation and stimulate [3H]-palmitate oxidation in normal islets but not in islets from fa/fa rats. Overexpression of normal OB-R in islets of fa/fa rats corrects all of the foregoing abnormalities and reverses the diabetic phenotype. PPARalpha is a OB-R-dependent factor required for normal fat homeostasis in islet cells.