Glucose production by the liver is essential for providing a substrate for the brain during fasting. The inability of insulin to suppress hepatic glucose output is a major aetiological factor in the hyperglycaemia of type-2 diabetes mellitus and other diseases of insulin resistance(1,2). For fifty years, one of the few classes of therapeutics effective in reducing glucose production has been the biguanides, which include phenformim and metformin, the latter the most frequently prescribed drug for type-2 diabetes(3). Nonetheless, the mechanism of action of biguanides remains imperfectly understood. The suggestion a decade ago that metformin reduces glucose synthesis through activation of the enzyme AMP-activated protein kinase (AMPK) has recently been challenged by genetic loss-of-function experiments(4). Here we provide a novel mechanism by which metformin antagonizes the action of glucagon, thus reducing fasting glucose levels. In mouse hepatocytes, metformin leads to the accumulation of AMP and related nucleotides, which inhibit adenylate cyclase, reduce levels of cyclic AMP and protein kinase A (PICA) activity, abrogate phosphorylation of critical protein targets of PICA, and block glucagon-dependent glucose output from hepatocytes. These data support a mechanism of action for metformin involving antagonism of glucagon, and suggest an approach for the development of antidiabetic drugs.