This work aims to estimate the prevalence of sarcopenia and to investigate the association between sarcopenia and functional performance in patients with and without diabetes admitted for inpatient rehabilitation. Consecutive patients admitted to the subacute inpatient rehabilitation unit at St Vincent's Hospital Melbourne, Australia (November 2016 to March 2020) were prospectively recruited into this cross-sectional study. Sarcopenia was diagnosed using the European Working Group on Sarcopenia in Older People 2018 algorithm. Participants' functional performance was measured by the total Functional Independence Measure, motor Functional Independence Measure, and the Short Physical Performance Battery. The association between sarcopenia and functional performance was investigated using quantile regression. Of 300 participants, 49 (16%) had a history of diabetes and 44 (14.7%) were diagnosed with sarcopenia. No significant difference in the prevalence of sarcopenia between patients with or without diabetes was identified (11/49, 22.5% vs 33/251, 13.2%, P = .12). In patients with diabetes, those with sarcopenia had significantly reduced functional performance compared to those without sarcopenia on Functional Independence Measure, motor Functional Independence Measure, and the Short Physical Performance Battery, whereas in patients without diabetes no significant difference between patients with and without sarcopenia were identified for either functional performance measure (all P values for interaction < .005). The diagnosis of sarcopenia was associated with a reduced functional performance on admission to inpatient rehabilitation in patients with diabetes, but not in those without diabetes. Further investigation is needed into the progress of patients with dual diagnoses of diabetes and sarcopenia in inpatient rehabilitation.