OBJECTIVE - Insulin resistance, associated with increased lipolysis, results in a high exposure of nonadipose tissue to lipids. Experimental data indicate that fatty infiltration of pancreatic islets may also contribute to β-cell dysfunction, but whether this occurs in humans in vivo is unknown. RESEARCH DESIGN AND METHODS - Using proton magnetic resonance spectroscopy and oral glucose tolerance tests, we studied the association of pancreatic lipid accumulation in vivo and various aspects of β-cell function in 12 insulin-naive type 2 diabetic and 24 age- and BMI-matched nondiabetic men. RESULTS - Patients versus control subjects had higher A1C, fasting plasma glucose, and insulin and triglyceride levels and lower HDL cholesterol, but similar waist circumference. Median (interquartile range) pancreatic fat content in patients and control subjects was 20.4% (13.4-43.6) and 9.7% (7.0-20.2), respectively (P = 0.032). Pancreatic fat correlated negatively with β-cell function parameters, including the insulinogenic index adjusted for insulin resistance, early glucose-stimulated insulin secretion, β-cell glucose sensitivity, and rate sensitivity (all P < 0.05), but not potentiation. However, these associations were significantly affected by the diabetic state, such that a significant association of pancreatic fat with β-cell dysfunction was only present in the nondiabetic group (all P < 0.01), suggesting that once diabetes occurs, factors additional to pancreatic fat account for further β-cell function decline. In control subjects, the association of pancreatic fat and β-cell function remained significant after correction for BMI, fasting plasma glucose, and triglycerides (P = 0.006). CONCLUSIONS - These findings indicate that pancreatic lipid content may contribute to β-cell dysfunction and possibly to the subsequent development of type 2 diabetes in susceptible humans.