BACKGROUND: Physical disability is increasingly recognized as an adverse health consequence of type 2 diabetes in older adults. We studied the effect of diabetes on disability in middle-aged and older adults to: 1) characterize the association of diabetes with physical disability in middle-aged adults, and 2) determine the extent to which the effect of diabetes is explained by related covariates in either or both age groups. METHODS: We used data from two parallel national panel studies of middle-aged and older adults to study the effect of self-reported diabetes at baseline on disability 2 years later, adjusting for baseline covariates. RESULTS: Diabetes was strongly associated with subsequent physical disability (measured by a composite variable combining activities of daily living, mobility, and strength tasks) in middle-aged and older adults. Controlling for socioeconomic characteristics and common diabetes-related and unrelated comorbidities and conditions reduced the diabetes effect substantially, but it remained a significant predictor of disability in both groups. CONCLUSIONS: Our analyses demonstrated that disability is an important diabetes-related health outcome in middle-aged and older adults that should be prevented or mitigated through appropriate diabetes management.