Emerging data indicate that gut-derived endotoxin (metabolic endotoxemia) may contribute to low-grade systemic inflammation in insulin-resistant states. Specific gut bacteria seem to serve as lipopolysaccharide (LPS) sources and several reports claim a role for increased intestinal permeability in the genesis of metabolic disorders. Therefore, we investigated the serum levels of LPS and zonulin (ZO-1, a marker of gut permeability) along with systemic levels of tumor necrosis factor-α (TNF-α) and Interleukin-6 (IL-6) in patients with type 2 diabetes mellitus (T2DM) compared to control subjects. Study subjects were recruited from the Chennai Urban Rural Epidemiology Study CURES, Chennai, India. Study group ( n  = 45 each) comprised of a) subjects with normal glucose tolerance (NGT) and (b) patients with T2DM. LPS, ZO-1, TNF-α, and IL-6 levels were measured by ELISA. Serum levels of LPS p  < 0.05, LPS activity p  < 0.001, ZO-1 p  < 0.001, TNFα p  < 0.001, and IL-6 p  < 0.001 were significantly increased in patients with T2DM compared to control subjects. Pearson correlation analysis revealed that LPS activity was significantly and positively correlated with ZO-1, fasting plasma glucose, 2 h post glucose, HbA1c, serum triglycerides, TNF-α, IL-6, and negatively correlated with HDL cholesterol. Regression analysis showed that increased LPS levels were significantly associated with type 2 diabetes odds ratio (OR) 13.43, 95 % CI 1.998–18.9; p  = 0.003. In Asian Indians who are considered highly insulin resistant, the circulatory LPS levels, LPS activity, and ZO-1 were significantly increased in patients with type 2 diabetes and showed positive correlation with inflammatory markers and poor glycemic/lipid control.