“You gotta consider that free fatty acids may be causing insulin resistance….blah, blah, blah…which if it occurs in the liver, they may both be right!”
It refers to somewhat mysterious higher-than-expected blood sugars in the early morning hours, as between 6 an 9 AM. Even if you don’t eat breakfast; that’s why it seems mysterious. Assuming you slept all night, why would your blood sugars be too high, even before breakfast?
Dr. Richard Bernstein talks about it at DiabetesHealth. Dr Bernstein is a great resource for folks with diabetes, and to physicians who treat diabetes.
Peter at Hyperlipid suggests that dawn phenomenon isn’t as simple and straightforward as Dr. Bernstein says. In fact, Peter seriously questions, Dr. Bernstein’s explanation that it’s caused by the liver removing too much insulin from circulation. For those who don’t click through, I’ll summarize by saying Peter found evidence that nighttime growth hormone elevations (this is normal) lead to lipolysis (breakdown of body fats into free fatty acids to be used by various tissues for energy) and the FFA’s cause a degree of insulin resistance, leading to higher blood sugar levels in the early morning.
As a practical side note, some people with diabetes (should I start using PWD’s?) seem to suppress Dawn Phenom by drinking alcohol at bedtime.
Diabetic Mediterranean Diet 
High blood sugar in the morning is caused by a process called gluconeogensis. The liver breaks down protein and converts it to glucose. This happens due to insulin resistance, the liver cells are not receiving the signals of insulin hormone due to fatty liver. Chronically elevated glucose from high carb diets cause insulin levels to remain high. Insulin signals cells to store the glucose as fat. Fat eventually accumulates in the liver making these cells resistant to its signals. Since the liver cannot properly receive insulin signals it uses gluconeogensis to nourish cells as you sleep. Substituting cold processed, natural fats for carbs (especially grains) restores insulin signaling over time.
This post of Nigel Kilburn’s makes an interesting point
http://nigeepoo.blogspot.co.nz/2012/04/how-eating-sugar-starch-can-lower-your.html
(I quote)
Jason wrote:
“Even more weird – now that I have introduced the starches into the diet – I have actually got better control now. I thought my insulin needs would go up – but they haven’t. They’ve gone down.”
To which I replied:
“How about this for an explanation? You now have a well-controlled glucose input to your circulation via diet, which has suppressed the poorly-controlled glucose input to your circulation via hepatic glucose production.”
Hepatic glucose production (HGP) is increased by Glucagon, Cortisol & Adrenaline/Epinephrine. These are secreted as blood glucose level falls below certain values in order to keep our brains alive.
As keeping our brains alive is rather important (!), the mechanism is fairly crude in operation and blood glucose can overshoot in a positive direction, as a bit of glycation is less harmful than brain death.
Hyperglycaemia requires insulin to lower blood glucose back to the normal range.
Therefore, eating some (but not too much) sugar & starch can result in lower blood glucose level and lower insulin secretion.
You may be on to something there, George.
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