The most commonly detected polymorphism in human insulin receptor substrate-1 (IRS-1), a glycine to arginine change at codon 972 (G972R), is associated with an increased risk of Type 2 diabetes and insulin resistance. To determine the molecular mechanism by which this polymorphism may be linked to insulin resistance, we produced recombinant peptides comprising amino acid residues 925-1008 from IRS-1 that contain either a glycine or arginine at codon 972 and the two nearby tyrosine phosphorylation consensus sites (EY(941)MLM and DY(989)MTM), which are known binding sites for the p85alpha regulatory subunit of phosphatidylinositol 3-kinase. The wild type peptide could be phosphorylated at these sites in vitro by purified insulin receptor. Introduction of the G972R polymorphism into the peptide reduced the amount of tyrosine phosphorylation by >60%. Pull-down experiments indicated that there was an association between the IRS-1-(925-1008) peptide and the insulin receptor that was markedly enhanced by the presence of the G972R polymorphism. The use of additional overlapping fragments localized this interaction to domains between residues 950-986 of IRS-1 and residues 966-1271 of the insulin receptor, containing the tyrosine kinase domain of the receptor. In addition, the IRS-1-(925-1008) G972R peptide acted as a competitive inhibitor of insulin receptor and insulin-like growth factor-1 receptor autophosphorylation. Taken together, these data indicate that the G972R naturally occurring polymorphism of IRS-1 not only reduces phosphorylation of the substrate but allows IRS-1 to act as an inhibitor of the insulin receptor kinase, producing global insulin resistance.