Ischemia caused by narrowing of femoral artery is a major cause of peripheral arterial disease and morbidity affecting patients with diabetes mellitus. We have previously reported that the inhibition of the angiogenic response to VEGF (vascular endothelial growth factor) in diabetic mice was associated with the increased expression of SHP-1 (SH2 domain-containing phosphatase 1), a protein that can be activated by the AT2 (angiotensin II type 2) receptor. Deletion of AT2 receptor has been shown to promote angiogenesis within the ischemic muscle. However, the relative impact of AT2 receptor in diabetic condition remains unknown. Nondiabetic and diabetic AT2 null (Atgr2-/Y) mice underwent femoral artery ligation after 2 months of diabetes mellitus. Blood perfusion was measured every week ≤4 weeks post-surgery. Expression of the VEGF, SHP-1, and renin-angiotensin pathways was evaluated. Blood flow in the ischemic muscle of diabetic Atgr2-/Y mice recovered faster and ≤80% after 4 weeks compared with 51% recovery in diabetic control littermates. Diabetic Atgr2-/Y had reduced apoptotic endothelial cells and elevated small vessel formation compared with diabetic Atgr2+/Y mice, as well as increased SHP-1 expression and reduced VEGF receptor activity. In endothelial cells, high glucose levels and AT2 agonist treatment did not change SHP-1, VEGF, and VEGF receptor expression. However, the activity of SHP-1 and its association with the VEGF receptors were increased, causing inhibition of the VEGF action in endothelial cell proliferation and migration. Our results suggest that the deletion of AT2 receptor reduced SHP-1 activity and restored VEGF actions, leading to an increased blood flow reperfusion after ischemia in diabetes mellitus.