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To increase awareness about the close interrelationship between nonalcoholic fatty liver disease and type 2 diabetes mellitus, and of recent diagnostic and treatment advances in the field.The perception of nonalcoholic fatty liver disease as an uncommon and benign condition is rapidly changing. Approximately 70% of persons with type 2 diabetes mellitus have a fatty liver and the disease follows a more aggressive course with necroinflammation and fibrosis (i.e. nonalcoholic steatohepatitis) in diabetes. New evidence suggests that it is not steatosis per se but the development of lipotoxicity-induced mitochondrial dysfunction and activation of inflammatory pathways that leads to progressive liver damage. Nonalcoholic steatohepatitis is a leading cause of end-stage liver disease and contributes to cardiovascular disease in patients with type 2 diabetes mellitus. Because nonalcoholic steatohepatitis may develop even in the presence of normal liver transaminases, a liver biopsy is still necessary for a definitive diagnosis. However, new imaging methods and plasma biomarkers are emerging as alternative diagnostic tools. Lifestyle intervention is the gold standard for the management of nonalcoholic steatohepatitis. Recent randomized controlled trials suggest thiazolidiendiones are promising therapeutic agents.Nonalcoholic steatohepatitis is a frequently overlooked and potentially severe complication of type 2 diabetes mellitus. Patients may benefit from its early diagnosis and treatment.