Hepatic mitochondrial dysfunction is thought to play a role in the development of liver steatosis and insulin resistance, which are both common characteristics of obesity and type 2 diabetes mellitus (T2DM). It was hypothesized that the antioxidant properties of melatonin could potentially improve the impaired functions of hepatic mitochondria in diabetic obese animals. Male Zucker diabetic fatty (ZDF) rats and lean littermates (ZL) were given either melatonin (10 mg/kg BW/day) orally for 6 wk (M‐ZDF and M‐ZL) or vehicle as control groups (C‐ZDF and C‐ZL). Hepatic function was evaluated by measurement of serum alanine transaminase and aspartate transaminase levels, liver histopathology and electron microscopy, and hepatic mitochondrial functions. Several impaired functions of hepatic mitochondria were observed in C‐ZDF in comparison with C‐ZL rats. Melatonin treatment to ZDF rats decreases serum levels of ALT (P < 0.001), alleviates liver steatosis and vacuolation, and also mitigates diabetic‐induced mitochondrial abnormalities, glycogen, and lipid accumulation. Melatonin improves mitochondrial dysfunction in M‐ZDF rats by increasing activities of mitochondrial citrate synthase (P < 0.001) and complex IV of electron transfer chain (P < 0.05) and enhances state 3 respiration (P < 0.001), respiratory control index (RCR) (P < 0.01), and phosphorylation coefficient (ADP/O ratio) (P < 0.05). Also melatonin augments ATP production (P < 0.05) and diminishes uncoupling protein 2 levels (P < 0.001). These results demonstrate that chronic oral melatonin reduces liver steatosis and mitochondria dysfunction in ZDF rats. Therefore, it may be beneficial in the treatment of diabesity.