There is a LOT of info here (and references) as this is a fairly recent (2006) review paper.
A personal aside: I'm often accused of bashing low carb diets. Many times I'll get the "why are you here" if I don't agree with dogma or dare suggest that certain versions of LC may well not be as healthy for certain people as they think they are. I started researching when my weight loss plateaued out to ensure myself that this WOE was indeed not unhealthy. If you're interested in more details on that, I've posted some thoughts here at my non-science blog.
Basically I've come across a lot of information on free fatty acids (NEFA/FFA) that does at least give me pause regarding especially the more extreme versions of LC. This is one review paper that got me started. I'll quote a few excerpts, but encourage even the less technically minded to give this a read.
Both obesity and type 2 diabetes are associated with insulin resistance4. But most obese, insulin-resistant individuals do not develop hyperglycaemia. Under normal conditions, the pancreatic islet β-cells increase insulin release sufficiently to overcome the reduced efficiency of insulin action, thereby maintaining normal glucose tolerance5–7. For obesity and insulin resistance to be associated with type 2 diabetes, β-cells must be unable to compensate fully for decreased insulin sensitivity8. β-cell dysfunction exists in individuals who are at high risk of developing the disease even when their glucose levels are still normal8. Non-esterified fatty acids (NEFAs) induce insulin resistance and impair β-cell function, making them a likely culprit.
The release of NEFAs may be the single most critical factor in modulating insulin sensitivity. Increased NEFA levels are observed in obesity and type 2 diabetes, and are associated with the insulin resistance observed in both24,25. Insulin resistance develops within hours of an acute increase in plasma NEFA levels in humans26. Conversely, insulin mediated glucose uptake and glucose tolerance improve with an acute decrease in NEFA levels after treatment with the antilipolytic agent acipimox27. Increased intracellular NEFAs might result in competition with glucose for substrate oxidation leading to the serial inhibition of pyruvate dehydrogenase, phosphofructokinase and hexokinase II activity28. It has also been proposed that increased NEFA delivery or decreased intracellular metabolism of fatty acids results in an increase in the intracellular content of fatty acid metabolites such as diacylglycerol (DAG), fatty acyl-coenzyme A (fatty acyl-CoA), and ceramides, which, in turn, activate a serine/threonine kinase cascade leading to serine/threonine phosphorylation of insulin receptor substrate-1 (IRS-1) and insulin receptor substrate-2 (IRS-2), and a reduced ability of these molecules to activate PI(3)K29. Subsequently, events downstream of insulin-receptor signalling are diminished.
In my humble opinion, NEFA/FFA levels are not given their proper due in health assessments. So much focus on LDL and triglycerides for the lipids and BG levels. All of my research points to one of the purposes of the FFA/Triglyceride cycle is to regulate circulating NEFA. In diabetics this biomarker is elevated.
The three metabolic substrates of ingested macronutrients are glucose from carbs, amino acids from proteins and free fatty acids from fats (mainly triglycerides). In diabetics, both BG's and NEFA's are elevated. IMO, they should change the name of Type II diabetes to something else or come up with some sub-classifications. Why? Because it really is a totally different disease from Type I and there's lots of variability among T2's.
A Type I diabetic already cannot produce insulin. Therefore it makes sense to limit carb consumption and perhaps protein as well to reduce the amount of insulin required and BG spikes. This will keep BG's more constant and controllable with metered doses. Insulin pumps to maintain an appropriate basal level should help with the NEFA's. But most T1's are lean and not insulin resistant, so exogenous insulin supplied does its job.
But I've asked around to various T2's how they were diagnosed. It seems some docs will diagnose T2 on the basis of a single FBG or OGTT with no direct measurement of islet cell function/insulin response. IMO, the reason some T2's are "cured" with even a modest weight loss is because I believe each of us has a "full line" on our adipose tissue -- and, it appears, the "full line" on visceral fat depots is the more critical one for some reason. This is highly individual, is likely very low in a naturally lean person who develops T2, and perhaps why bottom heavy women tend to be at lower risk since we have more storage capacity in less metabolically active stores. It seems to me that when we reach that limit, whatever it is, then our daily turnover is more like spilling over a bathtub. Lower the level in the tub even a little bit and now we are back to pouring in and draining out similar amounts w/o overflow under hypo or isocaloric levels.
In any case, it would seem that treatment of T2 should be highly individualized because the metabolic picture can be quite different yet result in similar glucose levels. We only tend to look at BG and make assumptions. If a person has a poor showing on an oral glucose tolerance test (OGTT), it could be due to IR so the glucose is not cleared even with an impressive release of insulin, or, the person could have impaired beta cell function and not secrete enough insulin. Without measuring both, how can you tell? The treatment of each situation should be different. Again, I'm not a doc, but I've asked T2's on discussion forums, read the blogs of a few diabetics, and read diagnostic criteria at various sites, and it does not appear that insulin response is commonly measured.
For the former, strategies should be employed to reverse the IR state. These are the "diabetics" that can be "cured", but also the ones that I question the long term effects of a VLC diet -- VLC diets are almost always high in fat and result in higher NEFA's. NEFA's exert various direct effects on receptors and such independent of carb intake. And this paper makes a compelling case that NEFA --> IR & impaired beta cell function as a direction of causality. So this person may have greater success controlling BG in the short run following a VLC diet, but this may well be treating a symptom while exascerbating the cause. I'm not a doc, but there seems to be a total disregard of NEFA's among the LC proponents of such diets to treat their condition. If someone is still producing insulin -- even in excess of what would be needed normally -- shouldn't we do everything we can to maintain that function? LC diets do impair insulin function in the long run by both contributing to IR and reducing insulin response. The low carb intake masks the insulin resistance but essentially sentences the person to extreme restriction. When these folks consume even small amounts of carbs their BG's go nuts and that seems to get worse the longer they stay VLC. Were I ever to be diagnosed with diabetes, I would insist on knowing what my insulin response is.
What of the T2's with already impaired insulin response? Again, if NEFA's are indeed the culprits in damaging these cells, does eating a diet that elevates them further make sense? Sure, BG's can be controlled better on LC, but again, as average citizen (albeit with relevant background) I would encourage these folks to do what they can to increase insulin sensitivity to make the most of the insulin they do have. I've come across papers (don't save everything unfortunately) indicating that at least initially the reduced insulin output is due to signalling errors and/or reversible changes in the beta cells. IOW, if the "toxic" environment is reversed, it is feasible to reverse this too. There may be something to pharmaceutical (metformin) intervention coupled with a moderate carb reducing diet as a better course of action here.
Certain T2 treatments are insulin secretagogues. Certain protein cocktails can also improve insulin response in those with impaired insulin response. This tells me even "progressed" T2 could theoretically be reversed.
Lastly, the elevated basal insulin of the obese is apparently related to the degree of adiposity and not dietary content. It appears that this is mediated by leptin which correlates with fat mass. Leptin signals insulin and therefore basal levels of both of these hormones correlate with fat mass. Reductions are seen in fasting insulin with reduction in body fat mass, and various studies I've seen comparing diets do not demonstrate a better effect of LC.