A fantastic read on t-nation has Dr. Jeff Volek talking about low carb dieting.

Basic biochemistry and metabolism would predict that carbs have a dominate effect on metabolism due to the close connection with insulin. Building on this notion, our research points to the idea that dietary fat plays a relatively passive role, and detrimental effects of fat will generally be seen only in the presence of high carbohydrate which, via insulin, determines the metabolic fate of ingested fat.Again, in the real world, some people will need to restrict carbs more than others to kick into fat burning mode, and others will be able to tolerate more carbs without observing adverse effects.

In the absence of insulin, dietary fat doesn’t necessarily become body fat. In fact, without insulin, your body will use fat for energy. Insulin is released when the blood sugar level rises above a certain threshold. Given that fat doesn’t increase blood sugar level, keeping sugar out of your diet is going to mean your body uses fat for energy.

I’ve been screamed at for suggesting this before and I’m sure I’ll get screamed at again in the future. But the science is starting to pile-up that both confirms and explains the observation that limiting carbs will cause your body fat level to drop.