Metabolic profiling of plasma nonesterified fatty acids discovered that palmitic acid (PA), a natural peroxisome proliferator–activated receptor γ (PPARγ) ligand, is a reliable type 2 diabetes biomarker. We investigated whether and how PA diabetic (d-PA) concentrations affected endothelial progenitor cell (EPC) and bone marrow–derived hematopoietic cell (BM-HC) biology. PA physiologic (n-PA) and d-PA concentrations were used. Proliferating cell nuclear antigen content and signal transducer and activator of transcription 5 (STAT5), PPARγ, cyclin D1, and p21Waf expression were evaluated. Small interfering RNA technology, gene reporter luciferase assay, electrophoretic mobility shift assay, chromatin immunoprecipitation assay, and coimmunoprecipitation were exploited. In vivo studies and migration assays were also performed. d-PA, unlike n-PA or physiological and diabetic oleic and stearic acid concentrations, impaired EPC migration and EPC/BM-HC proliferation through a PPARγ-mediated STAT5 transcription inhibition. This event did not prevent the formation of a STAT5/PPARγ transcriptional complex but was crucial for gene targeting, as p21Waf gene promoter, unlike cyclin D1, was the STAT5/PPARγ transcriptional target. Similar molecular events could be detected in EPCs isolated from type 2 diabetic patients. By expressing a constitutively activated STAT5 form, we demonstrated that STAT5 content is crucial for gene targeting and EPC fate. Finally, we also provide in vivo data that d-PA–mediated EPC dysfunction could be rescued by PPARγ blockade. These data provide first insights on how mechanistically d-PA drives EPC/BM-HC dysfunction in diabetes.