Abstract Context: Dipeptidyl peptidase IV (DPP-4) inhibitors improve glycemic control in patients with type 2 diabetes. The underlying mechanisms (incretin effect, β-cell function, endogenous glucose production) are not well known. Objective: The aim of the study was to examine mechanisms of the antihyperglycemic effect of DPP-4 inhibitors. Design, Setting, and Patients: We administered a mixed meal with glucose tracers ([6,6-2H2]-glucose infused, [1-2H]-glucose ingested), and on a separate day, a glucose infusion matched the glucose responses to the meal (isoglycemic test) in 50 type 2 diabetes patients (hemoglobin A1c = 7.4 ± 0.8%) and seven controls; 47 diabetic completers were restudied after 6 wk. Glucose fluxes were calculated, and β-cell function was assessed by mathematical modeling. The incretin effect was calculated as the ratio of oral to iv insulin secretion. Intervention: We conducted a 6-wk, double-blind, randomized treatment with sitagliptin (100 mg/d; n = 25) or placebo (n = 22). Results: Relative to placebo, meal-induced changes in fasting glucose and glucose area under the curve (AUC) were greater with sitagliptin, in parallel with a lower appearance of oral glucose [difference (post-pre) AUC = −353 ± 915 vs. +146 ± 601 μmol · kg−1 · 5 h] and greater suppression of endogenous glucose production. Insulin sensitivity improved 10%, whereas total insulin secretion was unchanged. During the meal, β-cell glucose sensitivity improved (+19[29] vs. 5[21] pmol · min−1 · m−2 · mm−1; median [interquartile range]) and glucagon AUC decreased (19.6 ± 7.5 to 17.3 ± 7.1 ng · ml−1 · 5 h), whereas intact glucose-dependent insulinotropic polypeptide and glucagon-like peptide-1 AUC increased with sitagliptin vs. placebo. The incretin effect was unchanged because sitagliptin increased β-cell glucose sensitivity also during the isoglycemic test. Conclusions: Chronic sitagliptin treatment improves glycemic control by lowering the appearance of oral glucose, postprandial endogenous glucose release, and glucagon response, and by improving insulin sensitivity and β-cell glucose sensing in response to both oral and iv glucose.