BACKGROUND & AIMS: Obesity-induced nonalcoholic fatty liver disease (NAFLD) develops, in part, via excess insulin-stimulated hepatic de novo lipogenesis, which increases, paradoxically, in patients with obesity-induced insulin resistance. Pleckstrin homology domain leucine-rich repeat protein phosphatase 2 (PHLPP2) terminates insulin signaling by dephosphorylating Akt; levels of PHLPP2 are reduced in livers from obese mice. We investigated whether loss of hepatic PHLPP2 is sufficient to induce fatty liver in mice, mechanisms of PHLPP2 degradation in fatty liver, and expression of genes that regulate PHLPP2 in livers of patients with NAFLD. METHODS: C57BL/6J mice (controls), obese db/db mice, and mice with liver-specific deletion of PHLPP2 (L-PHLPP2) fed either normal chow or high-fat diet (HFD) were analyzed for metabolic phenotypes, including glucose tolerance and hepatic steatosis. PHLPP2-deficient primary hepatocytes or CRISPR/Cas9-mediated PHLPP2-knockout hepatoma cells were analyzed for insulin signaling and gene expression. We performed mass spectrometry analyses of liver tissues from C57BL/6J mice transduced with Ad-HA-Flag-PHLPP2 to identify posttranslational modifications to PHLPP2 and proteins that interact with PHLPP2. We measured levels of mRNAs by quantitative reverse transcription polymerase chain reaction in liver biopsies from patients with varying degrees of hepatic steatosis. RESULTS: PHLPP2-knockout hepatoma cells and hepatocytes from L-PHLPP2 mice showed normal initiation of insulin signaling, but prolonged insulin action. Chow-fed L-PHLPP2 mice had normal glucose tolerance but hepatic steatosis. In HFD-fed C57BL/6J or db/db obese mice, endogenous PHLPP2 was degraded by glucagon and PKA-dependent phosphorylation of PHLPP2 (at Ser1119 and Ser1210), which led to PHLPP2 binding to potassium channel tetramerization domain containing 17 (KCTD17), a substrate-adaptor for Cul3-RING ubiquitin ligases. Levels of KCTD17 mRNA were increased in livers of HFD-fed C57BL/6J or db/db obese mice and in liver biopsies patients with NAFLD, compared with liver tissues from healthy control mice or patients without steatosis. Knockdown of KCTD17 with small hairpin RNA in primary hepatocytes increased PHLPP2 protein but not Phlpp2 mRNA, indicating that KCTD17 mediates PHLPP2 degradation. KCTD17 knockdown in obese mice prevented PHLPP2 degradation and decreased expression of lipogenic genes. CONCLUSIONS: In mouse models of obesity, we found that PHLPP2 degradation induced lipogenesis without affecting gluconeogenesis. KCTD17, which is up-regulated in liver tissues of obese mice and patients with NAFLD, binds to phosphorylated PHLPP2 to target it for ubiquitin-mediated degradation; this increases expression of genes that regulate lipogenesis to promote hepatic steatosis. Inhibitors of this pathway might be developed for treatment of patients with NAFLD.