The calpain-10 gene (CAPN10) has been associated with type 2 diabetes, but information on molecular and physiological mechanisms explaining this association is limited. Here we addressed this question by studying the role of CAPN10 for phenotypes associated with type 2 diabetes and free fatty acid (FFA) metabolism. Among 395 type 2 diabetic patients and 298 nondiabetic control subjects from Finland, the SNP-43 allele 1 (P = 0.011), SNP-63 allele 2 (P = 0.010), and the haplotype combination SNP-44/43/19/63 1121/1121 (P = 0.028) were associated with type 2 diabetes. The SNP-43 genotypes 11 and 12 were associated with higher fasting insulin and homeostasis model assessment (HOMA) insulin resistance index among control subjects (P = 0.021 and P = 0.0076) and with elevated FFA among both control subjects (P = 0.0040) and type 2 diabetic patients (P = 0.0025). Multiple regression analysis further indicated that SNP-43 is an independent predictor of FFA levels (P = 0.0037). Among 80 genotype discordant sibling pairs, the SNP-43 allele 1 was associated with elevated fasting serum insulin and HOMA index (P = 0.013 and P = 0.0068). None of the four SNPs showed distorted transmission of alleles to patients with type 2 diabetes in a qualitative transmission disequilibrium test, including 108 trios. Because FFA and insulin resistance are known to predict type 2 diabetes, the finding that variation in the CAPN10 gene influences FFA levels and insulin resistance may provide an explanation for how the CAPN10 gene increases susceptibility to type 2 diabetes.