It has been proposed that liver dysfunction may contribute to the development of type 2 diabetes. The aim of the present study was to examine whether elevated hepatic enzymes (alanine aminotransferase [ALT], aspartate aminotransferase [AST], or gamma -glutamyltranspeptidase [GGT]) are associated with prospective changes in liver or whole-body insulin sensitivity and/or insulin secretion and whether these elevated enzymes predict the development of type 2 diabetes in Pima Indians. We measured ALT, AST, and GGT in 451 nondiabetic (75-g oral glucose tolerance test) Pima Indians (aged 30 +/- 6 years, body fat 33 +/- 8%, ALT 45 +/- 29 units/l, AST 34 +/- 18 units/l, and GGT 56 +/- 40 units/l [mean +/- SD]) who were characterized for body composition (hydrodensitometry or dual-energy X-ray absorptiometry), whole-body insulin sensitivity (M), and hepatic insulin sensitivity (hepatic glucose output [HGO] during the low-dose insulin infusion of a hyperinsulinemic clamp) and acute insulin response (AIR) (25-g intravenous glucose challenge). Sixty-three subjects developed diabetes over an average follow-up of 6.9 +/- 4.9 years. In 224 subjects, who remained nondiabetic, follow-up measurements of M and AIR were available. At baseline, ALT, AST, and GGT were related to percent body fat (r = 0.16, 0.17, and 0.11, respectively), M (r = -0.32, - 0.28, and -0.24), and HGO (r = 0.27, 0.12, and 0.14; all P <0.01). In a proportional hazard analysis with adjustment for age, sex, body fat, M, and AIR, higher ALT [relative hazard 90th vs. 10th centiles (95% CI): 1.9 (1.1-3.3), P = 0.02], but not AST or GGT, predicted diabetes. Elevated ALT at baseline was associated prospectively with an increase in HGO (r = 0.21, P = 0.001) but not with changes in M or AIR (both P = 0.1). Higher ALT concentrations were cross-sectionally associated with obesity and whole-body and hepatic insulin resistance and prospectively associated with a decline in hepatic insulin sensitivity and the development of type 2 diabetes. Our findings indicate that high ALT is a marker of risk for type 2 diabetes and suggest a potential role of the liver in the pathogenesis of type 2 diabetes.