Older people with type 2 diabetes are at high risk of mobility disability. We investigated the association of diabetes with lower-limb muscle mass and muscle quality to verify whether diabetes-related muscle impairments mediate the association between diabetes and low walking speed. We performed a cross-sectional analysis of 835 participants (65 years old and older) enrolled in the InCHIANTI (Invecchiare in Chianti, aging in the Chianti area) population-based study. Total, muscular, and fat cross-sectional areas of the calf and relative muscle density were measured using peripheral quantitative computerized tomography. Indicators of muscle performance included knee-extension torque, ankle plantar flexion and dorsiflexion strength, lower-extremity muscle power, and ankle muscle quality (ratio of ankle strength to the muscle area kilograms per centimeters squared). Gait performance was assessed by 4- and 400-m walking speed. Diabetes was ascertained by standard American Diabetes Association criteria. Prevalence of diabetes was 11.4%. After adjustment for age and sex, participants with diabetes had lower muscle density, knee and ankle strength, and muscle power and worse muscle quality (all P < 0.05). Diabetic participants were also slower on both 4-m (β: -0.115 ± 0.024 m/s, P < 0.001) and 400-m (β:-0.053 ± 0.023 m/s, P < 0.05) walking tests. In multivariable linear regression models, lower-limb muscle characteristics accounted for 24.3 and 15.1% of walking speed difference comparing diabetic and nondiabetic subjects in the 4- and 400-m walks, respectively. In older persons, diabetes is associated with reduced muscle strength and worse muscle quality. These impairments are important contributors of walking limitations related to diabetes.