PPAR gamma is a nuclear receptor (especially prevalent in fat cells) that appears to have much to do with fat metabolism from several points of view. As a nuclear receptor, it can be modulated to alter synthesis of cell proteins that can influence fat cell growth and serum insulin activity as well as fat storage and turnover, among other things. Thus, it has very primary functions in energy utilization, which seem to be affected by the type of fat consumed.
The simple point is as this receptor is turned on or off by different molecules (particularly certain fatty acids), body fat depots can go up or down, ie. leanness or fatness are affected. This, in turn, can affect insulin sensitivity/resistance and ultimately diabetes, atherosclerosis, and particularly the more recently described Metabolic Syndrome. Individuals with this syndrome have increased LDL, decreased HDL, as well as increased TG and blood pressure, with insulin resistance that leads to type 2 diabetes.
The story gets interesting because PPARg appears to relate to the so-called "thrift" gene effect in certain populations, like the Pima Indians of the Southwestern US. Research has revealed that the dietary P/S ratio, ie . how many polyunsaturated-to-saturated fatty acids are present in the diet, can affect body fat deposits in a very sophisticated manner. First, it depends on the form of PPARg gene that you inherit in your fat cells (A or B form), which of course depends on your parents. Most people (80%) have the A form of PPARg (called Pro/Pro, if inheriting "Pro" from both parents). Much less common (< 20%) is Pro/Ala , when one parent contributes an "Ala".
Overall, those people who have the most common A form tend to be obese if the dietary P/S ratio is low (eg. < 0.5), but lean if the their diet P/S ratio is high (eg. > 1.0). Since most of us are A form and the US diet P/S ratio average is about 0.4, we would be prone to obesity from the combined genetic and environmental influences. On the other hand, extra polys in the diet to raise our P/S ratio should help us control body weight. But if you have B form of PPARg, then high poly would tend to lead to fat deposits and high insulin levels.
Something of a paradox exists in this relationship when it comes to diabetes. PPARg stimulates the development of fat cells as we grow, so the reservoir for fat deposition is enlarged and PPARg also increases insulin action to cause more glucose uptake, leading to more removal of blood glucose and fatty acids by cells, so blood glucose would decline and cell fat storage would rise. This is okay until the cells are full, at which point they signal the cell surface that NO more glucose or fatty acids are welcome. This leads to resistance to insulin action, a backup of glucose and fat in the blood, and eventually to diabetes and Metabolic Syndrome. The way to overcome this problem is to lose weight, ie. start burning the fat out of adipose cells, which opens the gateway again, and lowers blood glucose and fat to normal. Another irony occurs if you have too little PPARg during development, because it leads to few fat cells, so no space is available for storage. As a result, you can develop diabetes because you are too lean from lack of PPARg during development!
Franks PW, Luan J, Browne PO, Harding AH, O'Rahilly S, Chatterjee VK, Wareham NJ. Does peroxisome proliferator-activated receptor gamma genotype (Pro12ala) modify the association of physical activity and dietary fat with fasting insulin level? Metabolism. 2004 ; 53:11-6.