Obesity and type 2 diabetes are characterized by insulin resistance. Mice lacking the protein-tyrosine phosphatase PTP1B in all tissues are hypersensitive to insulin but also have diminished fat stores. Because adiposity affects insulin sensitivity, the extent to which PTP1B directly regulates glucose homeostasis has been unclear. We report that mice lacking PTP1B only in muscle have body weight and adiposity comparable to those of controls on either chow or a high-fat diet (HFD). Muscle triglycerides and serum adipokines are also affected similarly by HFD in both groups. Nevertheless, muscle-specific PTP1B(-/-) mice exhibit increased muscle glucose uptake, improved systemic insulin sensitivity, and enhanced glucose tolerance. These findings correlate with and are most likely caused by increased phosphorylation of the insulin receptor and its downstream signaling components. Thus, muscle PTP1B plays a major role in regulating insulin action and glucose homeostasis, independent of adiposity. In addition, rosiglitazone treatment of HFD-fed control and muscle-specific PTP1B(-/-) mice revealed that rosiglitazone acts additively with PTP1B deletion. Therefore, combining PTP1B inhibition with thiazolidinediones should be more effective than either alone for treating insulin-resistant states.