The above diagram is taken from a paper by Jeff Volek and co-authors, Low-Carbohydrate Diets Promote a More Favorable Body Composition Than Low-Fat Diets (pdf). It shows that the breakdown of fat, or lipolysis, is exquisitely sensitive to levels of the hormone insulin. “Small reductions in insulin within the physiological range are associated with a large increase in lipolysis.” You can see that as insulin levels drop into the low normal range, lipolysis increases exponentially, and still more so as levels get below normal.
So, what does this all mean exactly? Insulin is an anabolic hormone, that is, it tells the body to store energy and to grow. However, what it mostly does is tell the body to store fat. The main stimulus for insulin production is dietary carbohydrate. (Protein also stimulates insulin, but to a much lesser extent.) So whenever carbs are eaten, insulin rises and fat loss becomes next to impossible. Eat fewer carbs, and fat loss goes right up. “Small to moderate decreases in insulin can increase lipolysis several-fold, the response being virtually immediate.” The converse situation also holds true: increase insulin and fat storage goes up.
There you have it: how to lose fat. Decrease the carbohydrate content of your diet sufficiently to lower insulin levels, and the body starts breaking down its fat stores.
There are a few other wrinkles. for one, if you do a sustained low-carb diet, be sure to eat enough protein and perform regular resistance exercise in order to minimize the loss of lean tissue, mainly muscle mass. In studies where participants have done this, the weight loss has been almost entirely fat with very little muscle loss; in low-fat diets, by contrast, sometimes as much as half the weight lost is lean mass.