The effect of diabetes on 3,5,3'-triiodothyronine (T3) production was determined in the isolated perfused rat liver. Induction of diabetes with streptozotocin resulted in decreased serum thyroxine (T4) and T3 levels and a progressive decline in hepatic T3 production over 5 days. The decline in T3 production resulted from decreased conversion of T4 to T3, whereas T4 uptake was unchanged. Insulin administration restored serum T4 and T3, hepatic conversion of T4 to T3, and T3 production to normal levels. When serum T4 levels in diabetic rats were maintained by T4 administration, the conversion of T4 to T3 and T3 production returned to control levels. However, restoration of serum T4 levels in fasted rats failed to correct the decrease in hepatic T4 uptake or T3 production. Glucagon, at supraphysiological concentrations in vitro and in vivo, slightly decreased T4 uptake and T3 production without altering the conversion of T4 to T3. These data suggest that the fall in serum T4 levels observed in diabetic rats is important in mediating the decreased hepatic conversion of T4 to T3 and T3 production.