Low-grade inflammation is closely involved in the pathogenesis of type 2 diabetes and associated micro- and macrovascular complications. The nitric oxide (NO) precursor l-arginine, is relevant to diverse pathological conditions including type 2 diabetes and its complications. High sensitive-CRP (hs-CRP), neopterin and arginine levels were measured in 46 normoalbuminuric, 45 microalbuminuric type 2 diabetics and in 32 healthy controls in order to assess the relationship between markers of inflammation and l-arginine. Hs-CRP concentrations were higher in microalbuminuric diabetic patients compared to normoalbuminuric patients and controls. Diabetics had higher serum and urine neopterin levels than controls. Urine neopterin and l-arginine levels differed significantly among diabetic patients with and without microalbuminuria. There were significant positive correlations between hs-CRP and BMI in healthy controls and diabetics with and without microalbuminuria. In microalbuminuric diabetics, hs-CRP correlated with microalbuminuria (MAU). Significant predictors for the development of microalbuminuria were higher postprandial glucose levels, lower creatinine clearance and lower serum l-arginine levels. Assessment of early markers of inflammation and endothelial function, such as neopterin and NO precursor l-arginine, may help to predict incipient nephropathy more accurately in type 2 diabetic patients.