Accumulation of diacylglycerol (DG) in muscle is thought to cause insulin resistance. DG is a precursor for phospholipids, thus phospholipid synthesis could be involved in regulating muscle DG. Little is known about the interaction between phospholipid and DG in muscle; therefore, we examined whether disrupting muscle phospholipid synthesis, specifically phosphatidylethanolamine (PtdEtn), would influence muscle DG content and insulin sensitivity. Muscle PtdEtn synthesis was disrupted by deleting CTP:phosphoethanolamine cytidylyltransferase (ECT), the rate-limiting enzyme in the CDP-ethanolamine pathway, a major route for PtdEtn production. While PtdEtn was reduced in muscle-specific ECT knockout mice, intramyocellular and membrane-associated DG was markedly increased. Importantly, however, this was not associated with insulin resistance. Unexpectedly, mitochondrial biogenesis and muscle oxidative capacity were increased in muscle-specific ECT knockout mice and were accompanied by enhanced exercise performance. These findings highlight the importance of the CDP-ethanolamine pathway in regulating muscle DG content and challenge the DG-induced insulin resistance hypothesis.