β-sitosterol (SIT), the most abundant bioactive component of vegetable oil and other plants, is a highly potent antidiabetic drug. Our previous studies show that SIT controls hyperglycemia and insulin resistance by activating insulin receptor and glucose transporter 4 (GLUT-4) in the adipocytes of obesity induced type 2 diabetic rats. The current research was undertaken to investigate if SIT could also exert its antidiabetic effects by circumventing adipocyte induced inflammation, a key driving factor for insulin resistance in obese individuals. Effective dose of SIT (20 mg/kg b.wt) was administered orally for 30 days to high fat diet and sucrose induced type-2 diabetic rats. Metformin, the conventionally used antidiabetic drug was used as a positive control. Interestingly, SIT treatment restores the elevated serum levels of proinflammatory cytokines including leptin, resistin, tumor necrosis factor-α (TNF-α) and interleukin-6 (IL-6) to normalcy and increases anti-inflammatory adipocytokines including adiponectin in type 2 diabetic rats. Furthermore, SIT decreases sterol regulatory element binding protein-1c (SREBP-1c) and enhances Peroxisome Proliferator–activated receptor-γ (PPAR-γ) gene expression in adipocytes of diabetic rats. The gene and protein expression of c-Jun-N-terminal kinase-1 (JNK1), inhibitor of nuclear factor kappa-B kinase subunit beta (IKKβ) and nuclear factor kappa B (NF-κB) were also significantly attenuated in SIT treated groups. More importantly, SIT acts very effectively as metformin to circumvent inflammation and insulin resistance in diabetic rats. Our results clearly show that SIT inhibits obesity induced insulin resistance by ameliorating the inflammatory events in the adipose tissue through the downregulation of IKKβ/NF-κB and c-Jun-N-terminal kinase (JNK) signaling pathway.