We hypothesized that direct AT2R stimulation improves albuminuria in diabetes by preventing renal inflammation and improving oxidative stress. Normoglycemic controls (NCs) and streptozotocin-induced diabetes Sprague–Dawley rats (DM) were treated for 4 weeks with vehicle (V) or the AT2R agonist Compound 21 (C21). At the end of study, we evaluated blood pressure, urinary albumin to creatinine ratio (UACR), renal interstitial fluid (RIF) levels of tumor necrosis factor-α (TNF-α), interleukin 6 (IL-6), nitric oxide (NO), cGMP, and 8-isoprostane, and renal expression of TNF-α, IL-6, and AT2R. There were no significant differences in blood pressure between different treatments. DM rats demonstrated increased UACR, RIF TNF-α, IL-6 and 8-isoprostane, and messenger RNA (mRNA) for TNF-α and IL-6. DM rats also had reduced RIF NO and cGMP. C21 treatment of DM rats limited the increase in UACR, normalized RIF TNF-α, IL-6 and 8-isoprostane, and in mRNA for TNF-α and IL-6, and increased RIF NO and cGMP. In NC rats, C21 treatment did not change these parameters. AT2R mRNA and protein expressions increased in DM rats compared with NC but were not influenced by C21 treatment. We conclude that direct AT2R stimulation in diabetic rats improves diabetic albuminuria through the prevention of renal inflammation and improved production of NO and cGMP.