Rationale: Nocturnal hypoxemia is common in sleep-disordered breathing (SDB) and is associated with increased morbidity and mortality. Although impaired diffusing capacity of the lung for carbon monoxide (DlCO) is associated with daytime hypoxemia, its influence on SDB-related nocturnal hypoxemia is not known. Objectives: To characterize the effects of DlCO impairment on SDB-related nocturnal hypoxemia and associated health outcomes. Methods: Data from a multicenter cohort of men with and without human immunodeficiency virus (HIV) infection, with concomitant measures of DlCO and home-based polysomnography (n = 544), were analyzed. Multivariable quantile regression models characterized associations between DlCO and several measures of SDB-related hypoxemia (e.g., total sleep time with oxygen saturation as measured by pulse oximetry [SpO2] < 90% [T90]). Structural equation models were used to assess associations of impaired DlCO and SDB-related hypoxemia measures with prevalent hypertension and type 2 diabetes. Results: DlCO impairment (<80% predicted) was associated with sleep-related hypoxemia. Participants with severe SDB (apnea-hypopnea index ⩾ 30 events/h) and impaired DlCO had higher T90 (median difference, 15.0% [95% confidence interval (CI), 10.3% to 19.7%]) and average SDB-related desaturation (median difference, 1.0 [95% CI, 0.5 to 1.5]) and lower nadir SpO2 (median difference, -8.2% [95% CI, -11.4% to -4.9%]) and average SpO2 during sleep (median difference, -1.1% [95% CI, -2.1% to -0.01%]) than those with severe SDB and preserved DlCO. Higher T90 was associated with higher adjusted odds of prevalent hypertension (odds ratio, 1.39 [95% CI, 1.14 to 1.70]) and type 2 diabetes (odds ratio, 1.25 [95% CI, 1.07 to 1.46]). Conclusions: DlCO impairment in severe SDB was associated with sleep-related hypoxemia, prevalent hypertension, and type 2 diabetes. Assessment of SDB should be considered in those with impaired DlCO to guide testing and risk stratification strategies.