Background:  The renoprotective effect of angiotensin II antagonists has been demonstrated in type 2 diabetic patients with nephropathy but similar data on angiotensin‐converting enzyme (ACE) inhibitors are limited. We examined the efficacy and tolerability of fosinopril, an ACE inhibitor with dual hepatic and renal clearance, in 38 type 2 diabetic patients with moderate renal impairment (plasma creatinine 130–300 µmol/l) over a 2‐year period. Methods:  This was a single‐centre, randomized, double‐blinded, placebo‐controlled trial comparing fosinopril 20 mg daily vs. placebo in addition to conventional antihypertensive treatment over a 2‐year period. The primary endpoints were the rate of change and the percentage change in both 24‐h urinary albumin excretion (UAE) and creatinine clearance (CrCl). Results:  The mean age of the patients was 65 ± 6 years (range 47–76 years, median 66 years) and plasma creatinine 190 ± 49 µmol/l. For similar blood pressure control, the percentage change of UAE in patients with microalbuminuria was greater in the fosinopril than the placebo group (−24.2 ± 28.8 vs. 11.6 ± 42.1%, p = 0.003 after adjustment for baseline covariates). In the fosinopril group, the rate of change of endogenous CrCl was slower than the placebo group (−0.07 ± 0.19 vs. −0.24 ± 0.35 ml/min/week, p = 0.026). The incidence of adverse events was similar between the two groups. Conclusions:  Fosinopril treatment reduced albuminuria and rate of decline in renal function in type 2 diabetic patients with moderate renal insufficiency and did not increase the incidence of adverse events.