Kidney disease is one of the most devastating complications of diabetes, and tubular atrophy predicts diabetic kidney disease (DKD) progression to end-stage renal disease. We have proposed that fatty acids bound to albumin contribute to tubular atrophy by inducing lipotoxicity, after filtration across damaged glomeruli, and subsequent proximal tubule reabsorption by a fatty acid transport protein-2–dependent (FATP2-dependent) mechanism. To address this possibility, genetic (Lepr db/db eNOS–/–) and induced (high-fat diet plus low-dose streptozotocin) mouse models of obesity and DKD were bred with global FATP2 gene–deleted mice (Slc27a2) and then phenotyped. DKD-prone mice with the Slc27a2–/–genotype demonstrated normalization of glomerular filtration rate, reduced albuminuria, improved kidney histopathology, and longer life span compared with diabetic Slc27a2+/+ mice. Genetic and induced DKD-prone Slc27a2–/–mice also exhibited markedly reduced fasting plasma glucose, with mean values approaching euglycemia, despite increased obesity and decreased physical activity. Glucose lowering in DKD-prone Slc27a2–/–mice was accompanied by β cell hyperplasia and sustained insulin secretion. Together, our data indicate that FATP2 regulates DKD pathogenesis by a combined lipotoxicity and glucotoxicity (glucolipotoxicity) mechanism.