The effects and the mechanism of insulin treatment on intracellular lipid metabolism in liver of diabetic rats were evaluated. Type 2 diabetic rats were induced by injecting the streptozotocin (25 mg/kg) and fat rich food. According to the results of oral glucose tolerance test (OGTT) and glucose-induced insulin secretion test (IRT), the rats were divided into two groups; untreated group (UT) and insulin-treated group (IT). Normal rats (NC) served as controls. The treatment with either Humulin N (4–6 U/kg every day), or saline lasted for 4 weeks. Body weight, OGTT, IRT, blood lipids, intracellular lipids in liver, hepatic fatty acid oxidation and the activity of fatty acid synthase (FAS) were detected. The change of liver histology was observed. The insulin sensitivity index (ISI) was applied to assess the status of insulin resistance. The results showed that as compared with NC group, the plasma and hepatic intracellular Triglyceride (TG), total cholesterol (TC) and free fatty acids (FFAs) were increased significantly in UT group (P<0.05), and lipid droplets could be seen dispersedly in the liver specimens, the hepatic fatty acid oxidation was increased markedly (P<0.05), while the fatty acid synthase activity decreased (P<0.05). Insulin treatment resulted in a further accumulation of lipids in liver by 55.7%, 19.87% and 22.2% increase in TG, TC, FFAs respectively. The size of hepatocytes was enlarged and the cells were filled with fat drops. Plasma lipids showed little decrease and still significantly higher than those in NC group after the insulin treatment. Meanwhile, insulin treatment was companied by 20% decrease in the rate of fatty acid oxidation and 31% increase in hepatic FAS activity compared to UT group. It was concluded that treatment with insulin on type 2 diabetic rat increases hepatic intracellular lipid accumulation by inhibiting hepatic fatty acid oxidation and activating FAS.