Tumor necrosis factor-alpha (TNF) has been suggested to be the mediator of insulin resistance in infection, tumor cachexia, and obesity. We have previously shown that TNF diminishes insulin-induced tyrosine phosphorylation of insulin receptor substrate 1 (IRS-1). The current work examines potential mechanisms that mediate this event. TNF effect on IRS-1 in Fao hepatoma cells was not associated with a significant reduction in insulin receptor tyrosine kinase activity as measured in vitro but impaired the association of IRS-1 with phosphatidylinositol 3-kinase, localizing TNF impact to IRS-1. TNF did not increase protein-tyrosine phosphatase activity and protein-tyrosine phosphatase inhibition by vanadate did not change TNF effect on IRS-1 tyrosine phosphorylation, suggesting that protein-tyrosine phosphatases are not involved in this TNF effect. In contrast, TNF increased IRS-1 phosphorylation on serine residues, leading to a decrease in its electrophoretic mobility. TNF effect on IRS-1 tyrosine phosphorylation was not abolished by inhibiting protein kinase C using staurosporine, while inactivation of Ser/Thr phosphatases by calyculin A and okadaic acid mimicked it. Our data suggest that TNF induces serine phosphorylation of IRS-1 through inhibition of serine phosphatases or activation of serine kinases other than protein kinase C. This increased serine phosphorylation interferes with insulin-induced tyrosine phosphorylation of IRS-1 and impairs insulin action.