The phosphoinositide 3-kinase (PI3K) pathway is central to the metabolic actions of insulin on liver. Here, we show that mice with a liver-specific deletion of the p85alpha regulatory subunit of PI3K (L-Pik3r1KO) exhibit a paradoxical improvement of hepatic and peripheral insulin sensitivity. Although PI3K enzymatic activity is diminished in L-Pik3r1KO livers because of a reduced level of regulatory and catalytic subunits of PI3K, insulin-stimulated Akt activity is actually increased. This increased Akt activity correlates with increased phosphatidylinositol (3,4,5)-trisphosphate levels which are due, at least in part, to diminished activity of the (3,4,5)-trisphosphate phosphatase PTEN. Thus, the regulatory subunit p85alpha is a critical modulator of insulin sensitivity in vivo not only because of its effects on PI3K activation, but also as a regulator of PTEN activity.