Failure of insulin to elicit an increase in glucose uptake and metabolism in target tissues such as skeletal muscle is a major characteristic of non-insulin dependent type 2 diabetes mellitus. A strong correlation between intramyocellular triacylglycerol concentrations and the severity of insulin resistance has been found and led to the assumption that lipid oversupply to skeletal muscle contributes to reduced insulin action. However, the molecular mechanism that links intramyocellular lipid content with the generation of muscle insulin resistance is still unclear. It appears unlikely that the neutral lipid metabolite triacylglycerol directly impairs insulin action. Hence it is believed that intermediates in fatty acid metabolism, such as fatty acyl-CoA, ceramides or diacylglycerol (DAG) link fat deposition in the muscle to compromised insulin signaling. DAG is identified as a potential mediator of lipid-induced insulin resistance, as increased DAG levels are associated with protein kinase C activation and a reduction in both insulin-stimulated IRS-1 tyrosine phosphorylation and PI3 kinase activity. As DAG is an intermediate in the synthesis of triacylglycerol from fatty acids and glycerol, its level can be lowered by either improving the oxidation of cellular fatty acids or by accelerating the incorporation of fatty acids into triacylglycerol. This review discusses the evidence that implicates DAG being central in the development of muscular insulin resistance. Furthermore, we will discuss if and how modulation of skeletal muscle DAG levels could function as a possible therapeutic target for the treatment of type 2 diabetes mellitus.