FGF21, a member of the fibroblast growth factor (FGF) superfamily, has recently emerged as a regulator of metabolism and energy utilization. However, the exact mechanism(s) whereby FGF21 mediates its actions have not been elucidated. There is considerable evidence that insulin resistance may arise from aberrant accumulation of intracellular lipids in insulin-responsive tissues due to lipotoxicity. In particular, the sphingolipid ceramide has been implicated in this process. Here, we show that FGF21 rapidly and robustly stimulates adiponectin secretion in rodents while diminishing accumulation of ceramides in obese animals. Importantly, adiponectin-knockout mice are refractory to changes in energy expenditure and ceramide-lowering effects evoked by FGF21 administration. Moreover, FGF21 lowers blood glucose levels and enhances insulin sensitivity in diabetic Lep^ob/ob mice and diet-induced obese (DIO) mice only when adiponectin is functionally present. Collectively, these data suggest that FGF21 is a potent regulator of adiponectin secretion and that FGF21 critically depends on adiponectin to exert its glycemic and insulin sensitizing effects.