BACKGROUND Non-alcoholic fatty liver disease (NAFLD) is an independent predictor of type 2 diabetes mellitus (T2DM). Insulin resistance and beta-cell dysfunction are involved in the pathogenesis of T2DM. Insulin resistance is associated with NAFLD but little is known about beta-cell dysfunction and NAFLD. OBJECTIVE We tested whether NAFLD severity is associated with insulin sensitivity and beta-cell function in morbidly obese women. METHODS We studied 61 Caucasian women aged 18-60 years without T2DM and with a body mass index ranging from 35.3 to 48.8 kg/m². The insulin sensitivity index (ISI) and the disposition index (DI) from oral glucose tolerance testing were used as measures of insulin sensitivity and beta-cell function, respectively. Fat was measured by dual-energy X-ray absorptiometry. Fatty liver was diagnosed by ultrasonography and ordinally coded as 0 = none, 1 = light, 2 = moderate, 3 = severe. Proportional-odds logistic regression was used to evaluate the association of NAFLD severity with log(e)ISI and log(e)DI with and without correction for total and truncal fat. RESULTS The odds of more severe vs. less severe NAFLD decreased for increasing log(e)ISI [odds ratio (OR) 0.40, 95 % CI 0.19-0.84, p < 0.05] and log(e)DI (OR 0.80, 95 % CI 0.69-0.92, p < 0.01). Neither total nor truncal fat had any effect on these associations. CONCLUSIONS In morbidly obese women, NAFLD severity is inversely associated with insulin sensitivity and beta-cell function. The association of NAFLD severity with beta-cell dysfunction is stronger than that with insulin resistance.