Background: Type 2 diabetes is regarded as inevitably progressive with irreversible beta cell failure. However, resolution of type 2 diabetes has been possible with weight loss surgery, with evidence of restoration of normal metabolism. The hypothesis that both beta cell failure and insulin resistance that characterise type 2 diabetes can be reversed by dietary restriction of energy intake was tested. Methods: Eleven people with type 2 diabetes (49.5 ± 2.5 years, BMI 33.6 ± 1.2, nine male and two female) were studied before and after 1, 4 and 8 weeks of a 2.5 MJ (600 kcal)/day diet. Basal hepatic glucose output, hepatic and peripheral insulin sensitivity and beta cell function were measured. Pancreas and liver triglyceride content was measured using a three-point Dixon magnetic resonance imaging. An age-, sex- and weight- matched group of eight non-diabetic subjects was also studied. Results: After 1 week of restricted energy intake, fasting plasma glucose normalised in the diabetes group (9.2 ± 0.4 to 5.9 ± 0.4 mmol/l; p = 0.003) and remained in the normal range for the rest of the study duration. Fasting plasma insulin fell from 151 ± 104 to 73 ± 34 pmol/l after 1 week (p = 0.03) and to 57 ± 34 pmol/l by 8 weeks (p = 0.03 vs. baseline; p = 0.04 vs. non-diabetic group). Hepatic insulin sensitivity, assessed by the suppression of hepatic glucose production by insulin infusion, improved from 43 ± 4% to 74 ± 5% in the diabetes group (p = 0.003 vs. baseline; controls 68 ± 5%). This was associated with 30% reduction in hepatic triglyceride content during the first week of energy restriction (p < 0.001). Hepatic triglyceride content continued to decrease and fell by 70% over the 8 weeks (p = 0.003). There was no change in peripheral insulin sensitivity expressed as glucose disposal rates during the entire study. After 1 week of acute energy restriction, fasting insulin secretion rate fell from 0.10 ± 0.03 to 0.06 ± 0.03 nmol/min/m2 (p < 0.05) and remained constant thereafter. The first-phase insulin response increased (0.19 ± 0.02 to 0.46 ± 0.07 nmol/min/m2; p = 0.006; vs. non-diabetic group 0.62 ± 0.15 nmol/min/m2; p = 0.42 at 8 weeks). Maximal insulin response became supra-normal at 8 weeks (1.37 ± 0.27 vs. controls 1.15 ± 0.18 nmol/min/m2). These changes were seen in association with a decreased in pancreatic triglyceride content (8.0 ± 1.6% to 6.2 ± 1.1%; p = 0.03 vs. 8 weeks). Conclusion: Normalisation of both beta cell function and hepatic insulin sensitivity in type 2 diabetes was achieved by dietary energy restriction alone. This was associated with decreased pancreatic and liver triacylglyceride stores. The twin defects of beta cell failure and insulin resistance that underlies type 2 diabetes are reversible by reducing dietary energy intake.