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Fatty acids have positive and negative effects on pancreatic β-cell function. In the short term, they act as potentiators of insulin release, whereas in the long term, they impair insulin secretion. The metabolic fate of fatty acids in the β-cell is determined by the concomitant glucose concentration. In the absence of glucose, fatty acids preferentially undergo β-oxidation in the mitochondrion. In the presence of high glucose, metabolism of fatty acids is switched to the synthesis of cellular lipids. Acutely, the functional consequence of the glucose effect on lipid partitioning is that fatty acids do not initiate insulin release in the absence of the sugar but potentiate glucose-induced insulin secretion. Chronically, excessive concentrations of fatty acids impair β-cell function, a phenomenon that likely contributes to the deterioration of insulin secretion in type 2 diabetes. The hypothesis proposed in this review is that chronic, adverse effects of fatty acids are dependent upon the presence of elevated glucose levels and are mediated by prolonged, glucose-induced perturbations of intracellular lipid partitioning.