Illnesses associated with insulin resistance exhibit increases in whole-body protein degradation and amino acid oxidation. However, the mechanisms stimulating muscle catabolism under these conditions are not clear. Because insulin resistance is associated with accumulation of lipids in muscle, we measured protein degradation in muscles of mice fed a high-fat diet. Muscle protein catabolism was accelerated on the high-fat diet, and this was associated with an increase in plasma free fatty acid and a decrease in plasma levels of the adipocyte-derived cytokine adiponectin. To evaluate how free fatty acids influence adiponectin-mediated changes in muscle protein breakdown we examined C2C12 skeletal muscle cells exposed to free fatty acids. Both saturated fatty acids (palmitate) and unsaturated fatty acids (oleate) increased protein degradation (25% and 18% respectively) in part by activating the E3 ubiquitin ligases. Adenovirus-mediated over-expression of adiponectin blocked fatty acid-induced protein degradation in C2C12 cells. Palmitate activated the E3 ubiquitin ligases by suppressing IRS-1/Akt signaling in the C2C12 muscle cells, whereas adiponectin attenuated the E3 ubiquitin ligase activation by increasing both IRS-1 tyrosine phorphorylation and Akt ser473 phosphorylation. In related experiments, adiponectin over-expression decreased TNF and IL-6 expression in 3T3-L1 adipocytes while exposure to free fatty acids had the opposite effect. We conclude that the balance between free fatty acids and adiponectin impacts muscle proteolysis in insulin resistant conditions and suggests a role for adipose tissue-muscle crosstalk in diabetes and obesity.