Insulin secretion and sensitivity was studied in 28 prepubertal children born small for gestational age (SGA) and in 22 prepubertal children born appropriate for gestational age (AGA). The effect of body size during childhood was also assessed. Insulin sensitivity was measured using the hyperinsulinemic-euglycemic clamp (M value), and β-cell function was studied with the hyperglycemic clamp plus arginine. First-phase insulin response (FIR) was used to calculate the disposition index (FIR × M value). Arginine-stimulated second-phase insulin response was used as a measure of β-cell capacity. ΔBMI0–1 year, ΔBMI0–2 years, and ΔBMI2–9 years were classified in tertiles. SGA children were less insulin sensitive than AGA children (P = 0.009). β-Cell capacity and disposition indexes were similar in the two groups. In SGA children, M values were lower in the tertile with the highest ΔBMI2–9 years than in the tertile with the lowest ΔBMI2–9 years (P = 0.01). No association between ΔBMI0–2 years and decreased insulin sensitivity was found. In conclusion, prepubertal SGA children show decreased insulin sensitivity rather than decreased β-cell capacity. Interventions to improve fetal growth and prevent overweight after the second year of life appear to be important factors in the prevention of type 2 diabetes in children born SGA.