The present study has been conducted to quantify and compare the capacity of gas exchange in patients with type 2 diabetes mellitus (DM) and healthy controls and also to investigate the effects of various factors on alveolar capillary permeability. A total of 37 subjects, 25 patients with DM and 12 healthy controls were recruited for the study. All the participants were evaluated with simple spirometric tests and simple breath carbonmonoxide (CO) diffusion test (DLCO). The ratio of DLCO value to the alveolar ventilation (VA) was used to assess alveolar membrane permeability. Diabetic patients were also evaluated in detail with respect to degenerative diabetic complications including the presence of microalbuminuria, advanced nephropathy, sensorial and autonomic neuropathy, retinopathy, hypertension and macrovascular disease. The results of simple spirometric tests which determined lung capacity were similar in the diabetic patients and the healthy controls. Ratio of DLCO/VA, which determines alveolar membrane permeability, revealed statistically significant decline in pulmonary gas exchange in the diabetic group (p: 0.037). Pearson correlation analysis revealed statistically significant correlation between duration of diabetes mellitus, age and urinary albumin excretion with DLCO/VA values (Pearson: -0.726, p: 0.001; Pearson: -0.438, p: 0.036; Pearson: -0.472, p: 0.023 respectively). This study demonstrated the decreased alveolar gas exchange capacity in diabetic patients compared with healthy controls. Detrimental effects of DM on alveolar capillaries were found to be correlated with age, duration of DM and urinary albumin excretion. Microalbuminuria was the only significant predictor of DLCO/VA.