There are two major defects in type 2 diabetes: 1) insulin resistance and 2) insulin deficiency due to loss of beta-cell function. Here we demonstrated that treatment with muraglitazar (a dual peroxisome proliferator-activated receptor alpha/gamma activator), when initiated before or after the onset of diabetes in mice, is effective against both defects. In study 1, prediabetic db/db mice were treated for 12 weeks. The control mice developed diabetes, as evidenced by hyperglycemia, hyperinsulinemia, reduced insulin levels in the pancreas, blunted insulin response to glucose, and impaired glucose tolerance. The muraglitazar-treated mice had normal plasma glucose, and insulin levels, equivalent or higher pancreatic insulin content than normal mice, showed a robust insulin response to glucose and exhibited greater glucose tolerance. In study 2, diabetic db/db mice were treated for 4 weeks. The control mice displayed increased glucose levels, severe loss of islets, and their isolated islets secreted reduced amounts of insulin in response to glucose and exendin-4 compared with baseline. In muraglitazar-treated mice, glucose levels were reduced to normal. These mice showed reduced loss of islets, and their isolated islets secreted insulin at levels comparable to baseline. Thus, muraglitazar treatment decreased both insulin resistance and preserved beta-cell function. As a result, muraglitazar treatment, when initiated before the onset of diabetes, prevented development of diabetes and, when initiated after the onset of diabetes, prevented worsening of diabetes in db/db mice.