Tubulointerstitial abnormalities are predictive of the progression of diabetic kidney disease (DKD), and their targeting may be an effective means for prevention. Proximal tubular (PT) expression of kidney injury molecule (KIM)-1, as well as blood and urinary levels, are increased early in human diabetes and can predict the rate of disease progression. Here, we report that KIM-1 mediates PT uptake of palmitic acid (PA)-bound albumin, leading to enhanced tubule injury with DNA damage, PT cell-cycle arrest, interstitial inflammation and fibrosis, and secondary glomerulosclerosis. Such injury can be ameliorated by genetic ablation of the KIM-1 mucin domain in a high-fat-fed streptozotocin mouse model of DKD. We also identified TW-37 as a small molecule inhibitor of KIM-1-mediated PA-albumin uptake and showed in vivo in a kidney injury model in mice that it ameliorates renal inflammation and fibrosis. Together, our findings support KIM-1 as a new therapeutic target for DKD. Display omitted •KIM-1 is expressed in proximal tubules of humans with diabetic kidney disease•KIM-1 mediates the endocytic uptake of palmitic acid (PA)-bound albumin•KIM-1-mediated PA-albumin uptake leads to interstitial inflammation and fibrosis•TW-37 prevents KIM-1-mediated PA-albumin uptake and ameliorates tubular injury Mori et al. report that during diabetic kidney disease KIM-1 mediates proximal tubular uptake of palmitic acid-bound albumin, leading to enhanced tubule injury with interstitial inflammation and fibrosis, as well as secondary glomerulosclerosis. Further, they identify a small molecule inhibitor of KIM-1, TW-37, that can ameliorate the injury.