The current study was undertaken to investigate fatty acid metabolism by skeletal muscle to examine potential mechanisms that could lead to increased muscle triglyceride in obesity. Sixteen lean and 40 obese research volunteers had leg balance measurement of glucose and free fatty acid (FFA) uptake (fractional extraction of [9,10³H]oleate) and indirect calorimetry across the leg to determine substrate oxidation during fasting and insulin-stimulated conditions. Muscle obtained by percutaneous biopsy had lower carnitine palmitoyl transferase (CPT) activity and oxidative enzyme activity in obesity (P < 0.05). During fasting conditions, obese subjects had an elevated leg respiratory quotient (RQ, 0.83 ± 0.02 vs. 0.90 ± 0.01;P < 0.01) and reduced fat oxidation but similar FFA uptake across the leg. During insulin infusions, fat oxidation by leg tissues was suppressed in lean but not obese subjects; rates of FFA uptake were similar. Fasting values for leg RQ correlated with insulin sensitivity (r = −0.57, P < 0.001). Thirty-two of the obese subjects were restudied after weight loss (WL, −14.0 ± 0.9 kg); insulin sensitivity and insulin suppression of fat oxidation improved (P < 0.01), but fasting leg RQ (0.90 ± 0.02 vs. 0.90 ± 0.02, pre-WL vs. post-WL) and muscle CPT activity did not change. The findings suggest that triglyceride accumulation in skeletal muscle in obesity derives from reduced capacity for fat oxidation and that inflexibility in regulating fat oxidation, more than fatty acid uptake, is related to insulin resistance.