Inhibition of dipeptidyl peptidase-4 (DPP-4) activity improves glucose homeostasis through a mode of action related to the stabilization of the active forms of DPP-4-sensitive hormones such as the incretins that enhance glucose-induced insulin secretion. However, the DPP-4 enzyme is highly expressed on the surface of intestinal epithelial cells; hence, the role of intestinal vs. systemic DPP-4 remains unclear. To analyze mechanisms through which the DPP-4 inhibitor sitagliptin regulates glycemia in mice, we administered low oral doses of the DPP-4 inhibitor sitagliptin that selectively reduced DPP-4 activity in the intestine. Glp1r^−/− and Gipr^−/− mice were studied and glucagon-like peptide (GLP)-1 receptor (GLP-1R) signaling was blocked by an iv infusion of the corresponding receptor antagonist exendin (9–39). The role of the dipeptides His-Ala and Tyr-Ala as DPP-4-generated GLP-1 and glucose-dependent insulinotropic peptide (GIP) degradation products was studied in vivo and in vitro on isolated islets. We demonstrate that very low doses of oral sitagliptin improve glucose tolerance and plasma insulin levels with selective reduction of intestinal but not systemic DPP-4 activity. The glucoregulatory action of sitagliptin was associated with increased vagus nerve activity and was diminished in wild-type mice treated with the GLP-1R antagonist exendin (9–39) and in Glp1r^−/− and Gipr^−/− mice. Furthermore, the dipeptides liberated from GLP-1 (His-Ala) and GIP (Tyr-Ala) deteriorated glucose tolerance, reduced insulin, and increased portal glucagon levels. The predominant mechanism through which DPP-4 inhibitors regulate glycemia involves local inhibition of intestinal DPP-4 activity, activation of incretin receptors, reduced liberation of bioactive dipeptides, and activation of the gut-to-pancreas neural axis.