Although type 2 diabetes is determined primarily by lifestyle and genes, dietary composition may affect both its development and complications. Dietary fat is of particular interest because fatty acids influence glucose metabolism by altering cell membrane function, enzyme activity, insulin signaling, and gene expression. This paper focuses on the prevention of type 2 diabetes and summarizes the epidemiologic literature on associations between types of dietary fat and diabetes risk. It also summarizes controlled feeding studies on the effects of dietary fats on metabolic mediators, such as insulin resistance. Taken together, the evidence suggests that replacing saturated fats and trans fatty acids with unsaturated (polyunsaturated and/or monounsaturated) fats has beneficial effects on insulin sensitivity and is likely to reduce risk of type 2 diabetes. Among polyunsaturated fats, linoleic acid from the n-6 series improves insulin sensitivity. On the other hand, long-chain n-3 fatty acids do not appear to improve insulin sensitivity or glucose metabolism. In dietary practice, foods rich in vegetable oils, including non-hydrogenated margarines, nuts, and seeds, should replace foods rich in saturated fats from meats and fat-rich dairy products. Consumption of partially hydrogenated fats should be minimized. Additional controlled, long-term studies are needed to improve our knowledge on the optimal proportion of different types of fats to prevent diabetes.