Saturated fatty acids (FA) exert adverse health effects and are more likely to cause insulin resistance and type 2 diabetes than unsaturated FA, some of which exert protective and beneficial effects. Saturated FA, but not unsaturated FA, activate Jun N-terminal kinase (JNK), which has been linked to obesity and insulin resistance in mice and humans. However, it is unknown how saturated and unsaturated FA are discriminated. We now demonstrate that saturated FA activate JNK and inhibit insulin signaling through c-Src activation. FA alter the membrane distribution of c-Src, causing it to partition into intracellular membrane subdomains, where it likely becomes activated. Conversely, unsaturated FA with known beneficial effects on glucose metabolism prevent c-Src membrane partitioning and activation, which are dependent on its myristoylation, and block JNK activation. Consumption of a diabetogenic high-fat diet causes the partitioning and activation of c-Src within detergent insoluble membrane subdomains of murine adipocytes.