Type 2 diabetes has reached epidemic proportions in the United States. Large, randomized controlled trials suggest that menopausal hormone therapy (MHT) delays the onset of type 2 diabetes in women. However, the mechanisms and clinical implications of this association are still a matter of controversy. This review provides an up-to-date analysis and integration of epidemiological, clinical, and basic studies, and proposes a mechanistic explanation for the effect of menopause and MHT on type 2 diabetes development and prevention. We discuss the beneficial effects of endogenous estradiol with respect to insulin secretion, insulin sensitivity, and glucose effectiveness; we also discuss energy expenditure and adipose distribution, both of which are affected by menopause and improved by MHT, which thereby decreases the incidence of type 2 diabetes. We reconcile differences among studies that investigated the effect of menopause and MHT formulations on type 2 diabetes. We argue that discrepancies arise from physiological differences in methods used to assess glucose homeostasis, ranging from clinical indices of insulin sensitivity to steady-state methods to assess insulin action. We also discuss the influence of the route of estrogen administration and the addition of progestogens. We conclude that, although MHT is neither approved nor appropriate for the prevention of type 2 diabetes due to its complex balance of risks and benefits, it should not be withheld from women with increased risk of type 2 diabetes who seek treatment for menopausal symptoms.