Pigment epithelium derived factor (PEDF) is a multifunctional protein with antiangiogenic, anti-oxidative and anti-inflammatory properties. PEDF is involved in the pathogenesis of diabetic retinopathy, but its direct role in the kidneys remains unclear. We hypothesize that a PEDF fragment (P78-PEDF) confers kidney protection in diabetic nephropathy (DN). The localization of the full length PEDF protein were determined in DBA mice following multiple low doses of streptozotocin. Using immunohistochemistry, PEDF was localized in the kidney vasculature, interstitial space, glomeruli, tubules and renal medulla. Kidney PEDF protein and mRNA expression were reduced significantly in diabetic mice. Continuous infusion of P78-PEDF for 6 wks resulted in protection from DN as indicated by reduced albuminuria and blood urea nitrogen, increased nephrin expression, decreased kidney macrophage recruitment and inflammatory cytokines, and reduced histological changes compared with vehicle-treated diabetic mice. In vitro, P78-PEDF blocked the increase in podocyte permeability to albumin and disruption of the actin cytoskeleton induced by puromycin aminonucleoside (PAN) treatment. These findings highlight the importance of P78-PEDF peptide as a potential therapeutic modality in early phase diabetic renal injury.