The peroxisome proliferator-activated receptor-gamma (PPARgamma) is a direct pharmacological target for drugs that enhance insulin sensitivity and are used clinically for the treatment of type II diabetes. Because the specificity of ligand recognition is lower for PPARgamma than for other nuclear receptors, PPARgamma can bind a larger variety of ligand types. In order to elucidate why the ligand recognition of PPARgamma is so flexible, we performed correlated fragment molecular orbital calculations for complexes of PPARgamma and each of two distinctive ligands, rosiglitazone and farglitazar. We found quite different patterns of ligand binding for these two ligands. The ligand-binding system of rosiglitazone, a drug in common clinical use, is based mainly on local electrostatic interactions around the thiazolidine ring, whereas both electrostatic interactions and van der Waals dispersion interactions with hydrophobic residues are required for the binding of farglitazar to PPARgamma. We suggest that the development of novel ligands will require adequately hydrophobic pharmacophores.