Abstract Background Type 2 diabetes mellitus (T2DM) is emerging as a major public health challenge in Nepal. Behavioural, social and economic changes are likely to play a part in the rise of this chronic disease, as they are in many developing countries. A better understanding of the relationship between physical activity (PA), social and economic factors and T2DM can inform the design of prevention programs. Methods This study analysed data from 1977 Nepalese adults aged 40-69 years from the 2013 WHO STEPS survey. Socioeconomic position was determined based on education, occupation and ethnic group. Participants’ fasting blood glucose level was used to ascertain their diabetes status. Structural equation modelling was conducted to identify the regression pathways between PA, socioeconomic position, anthropometric and metabolic variables and T2DM. Results The overall prevalence of T2DM was 9% with almost double the burden among urban residents (17 %). Socioeconomic position (0.338), waist circumference (0.250), triglycerides (0.115) and hypertension (0.129) had a statistically significant direct effect on T2DM. PA had an indirect effect on T2DM mediated by waist circumference (-0.015). The indirect effects of socioeconomic position on T2DM were mediated by body mass index, waist circumference, triglycerides and total cholesterol. Conclusion Policies and programs to address T2DM in Nepal should address the factors contributing to unhealthy weight status, particularly among those of higher socioeconomic status. Key message Among Nepalese adults, higher socioeconomic position has a significant direct effect on T2DM, while both PA and higher socioeconomic position have significant indirect effects.