Recent evidence suggests that hormones such as insulin and leptin act in the hypothalamus to regulate energy balance and glucose metabolism. Here, we show that in leptin receptor-deficient Koletsky (fa^k/fa^k) rats, adenovirally-induced expression of leptin receptors in the area of the hypothalamic arcuate nucleus improved peripheral insulin sensitivity via enhanced suppression of hepatic glucose production, with no change of insulin-stimulated glucose utilization. This effect was associated with increased insulin signal transduction via phosphatidylinositol-3-OH kinase (as measured by pY-IRS-1 and pS-PKB/Akt) in liver, but not skeletal muscle, and with reduced hepatic expression of the gluconeogenic genes, glucose-6-phosphatase and phosphoenolpyruvate kinase. Moreover, the beneficial effects of hypothalamic leptin signaling on hepatic insulin sensitivity were blocked by selective hepatic vagotomy. We conclude that hypothalamic leptin action increases peripheral insulin sensitivity primarily via effects on the liver, and that the mechanism underlying this effect is dependent on the hepatic branch of the vagus nerve.