Constitutive androstane receptor CAR (NR1I3) has been identified as a central mediator of coordinate responses to xenobiotic and endobiotic stress. Here we use leptin-deficient mice (ob/ob) and ob/ob, CAR^−/− double mutant mice to identify a metabolic role of CAR in type 2 diabetes. Activation of CAR significantly reduces serum glucose levels and improves glucose tolerance and insulin sensitivity. Gene expression analyses and hyperinsulinemic euglycemic clamp results suggest that CAR activation ameliorates hyperglycemia by suppressing glucose production and stimulating glucose uptake and usage in the liver. In addition, CAR activation dramatically improves fatty liver by both inhibition of hepatic lipogenesis and induction of β-oxidation. We conclude that CAR activation improves type 2 diabetes, and that these actions of CAR suggest therapeutic approaches to the disease.