Diabetic nephropathy (DN) is the major life-threatening complication of diabetes. Abnormal permselectivity of glomerular basement membrane (GBM) plays an important role in DN pathogenesis. Heparanase is the predominant enzyme that degrades heparan sulfate (HS), the main polysaccharide of the GBM. Loss of GBM HS in diabetic kidney was associated with increased glomerular expression of heparanase; however, the causal involvement of heparanase in the pathogenesis of DN has not been demonstrated. We report for the first time the essential involvement of heparanase in DN. With the use of Hpse-KO mice, we found that deletion of the heparanase gene protects diabetic mice from DN. Furthermore, by investigating the molecular mechanism underlying induction of the enzyme in DN, we found that transcription factor early growth response 1 (Egr1) is responsible for activation of heparanase promoter under diabetic conditions. The specific heparanase inhibitor SST0001 markedly decreased the extent of albuminuria and renal damage in mouse models of DN. Our results collectively underscore the crucial role of heparanase in the pathogenesis of DN and its potential as a highly relevant target for therapeutic interventions in patients with DN.