Anaemia is a common finding in patients with diabetic nephropathy. Impaired production of erythropoietin is thought to be the predominant cause, as a result of renal microvascular disease. This study aims to determine the prevalence of functional erythropoietin deficiency in a cross-sectional survey of patients with Type 2 diabetes. Clinical data on 604 patients with Type 2 diabetes were obtained, including a full blood count, iron indices and detailed history of diabetic complications. Erythropoietin levels were correlated with the presence of anaemia, iron deficiency and renal dysfunction. Functional erythropoietin deficiency was defined by erythropoietin levels in the normal range despite the presence of anaemia. Nineteen per cent of patients (n = 112) were anaemic, among whom erythropoietin deficiency (76%) and reduced iron availability (58%) were common findings. Over 90% of patients had erythropoietin deficiency, once those with reduced iron stores or availability were excluded. Most of these patients had moderate renal impairment (60%, n = 67). However, even in the absence of renal impairment, 71% of anaemic patients (n = 32/45) had functional erythropoietin deficiency, although most had other evidence of nephropathy. In addition, two-thirds of patients with reduced iron availability were unable to increase erythropoietin above the normal range. These findings confirm the failure of the kidney to produce erythropoietin in response to a falling haemoglobin is a key component to anaemia in diabetes. The likelihood of functional erythropoietin deficiency as a cause of anaemia is not dependent on the severity of renal impairment or excluded in diabetic patients with reduced iron stores or availability.