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A high dietary fat intake and low physical activity characterize the current Western lifestyle. Dietary fatty acids do not stimulate their own oxidation and a surplus of fat is stored in white adipose tissue, liver, heart and muscle. In these organs intracellular lipids serve as a rapidly-available energy source during, for example, physical activity. However, under conditions of elevated plasma fatty acid levels and high dietary fat intake, conditions implicated in the development of modern diseases such as obesity and type 2 diabetes mellitus, fat accumulation in liver and muscle (intramyocellular lipids; IMCL) is associated with the development of insulin resistance. Recent data suggest that IMCL are specifically harmful when combined with reduced mitochondrial function, both conditions that characterize type 2 diabetes. In the (pre)diabetic state reduced expression of the transcription factor PPARγ co-activator-1α (PGC-1α), which is involved in mitochondrial biogenesis, has been suggested to underlie the reduced mitochondrial function. Importantly, the reduction in PGC-1α may be a result of low physical activity, consumption of high-fat diets and high plasma fatty acid levels. Mitochondrial function can also be impaired as a result of enhanced mitochondrial damage by reactive oxygen species. Fatty acids in the vicinity of mitochondria are particularly prone to lipid peroxidation. In turn, lipid peroxides can induce oxidative damage to mitochondrial RNA, DNA and proteins. The mitochondrial protein uncoupling protein 3, which is induced under high-fat conditions, may serve to protect mitochondria against lipid-induced oxidative damage, but is reduced in the prediabetic state. Thus, muscular lipotoxicity may impair mitochondrial function and may be central to insulin resistance and type 2 diabetes mellitus.