Background: Obstructive sleep apnea (OSA) is prevalent in people with obesity and is a major risk factor for type 2 diabetes (T2D). The effect of OSA on metabolic function and the precise mechanisms (insulin resistance, β-cell dysfunction, or both) responsible for the increased T2D risk in people with OSA are unknown. Design and methods: We used a two-stage hyperinsulinemic-euglycemic clamp procedure in conjunction with stable isotopically labeled glucose and palmitate tracer infusions and 18F-fluorodeoxyglucose injection and positron emission tomography to quantify multi-organ insulin action and oral and intravenous tolerance tests to evaluate glucose-stimulated insulin secretion in fifteen people with obesity and OSA and thirteen people with obesity without OSA. Results: OSA was associated with marked insulin resistance of adipose tissue triglyceride lipolysis and glucose uptake into both skeletal muscles and adipose tissue, whereas there was no significant difference between the OSA and control groups in insulin action on endogenous glucose production, basal insulin secretion, and glucose-stimulated insulin secretion during both intravenous and oral glucose tolerance tests. Conclusions: These data demonstrate that OSA is a key determinant of insulin sensitivity in people with obesity and underscore the importance of taking OSA status into account when evaluating metabolic function in people with obesity. These findings may also have important clinical implications because disease progression and the risk of diabetes-related complications vary by T2D subtype (i.e. severe insulin resistance vs insulin deficiency). People with OSA may benefit most from the targeted treatment of peripheral insulin resistance and early screening for complications associated with peripheral insulin resistance.