Purpose Association of subclinical hypothyroidism with type 2 diabetes and its complications has been previously documented. These reports were, however, inconclusive and mainly gathered from Chinese and East Asian populations. In this study, we aimed to determine the prevalence of subclinical hypothyroidism and its relationship with diabetic nephropathy in Iranian individuals with type 2 diabetes, drawn from a white Middle Eastern population with an increasing prevalence of diabetes. Methods In this cross- sectional study, 255 Iranian participants with type 2 diabetes and without history of thyroid disorders were included. Patients with TSH >4.2 mIU/ L and normal T4 were classified as having subclinical hypothyroidism. Diabetic nephropathy was diagnosed based on abnormal 24- h urinary albumin or protein measurements (24- h urinary albumin >= 30mg/ day or 24- h urinary protein >= 150 mg/ day). Multivariate logistic regression was employed to obtain the OR for the relationship between subclinical hypothyroidism and diabetic nephropathy. Results We found that subclinical hypothyroidism and diabetic nephropathy were as prevalent as 18.1 and 41.2 %, respectively, among the participants. We also found that subclinical hypothyroidism was independently associated with higher rates of diabetic nephropathy, after multivariable adjustment ( OR [ 95 % CI] 3.23 [ 1.42- 7.37], p = 0.005). Conclusions We found that the prevalence of subclinical hypothyroidism in Iranian diabetic population was among the highest rates reported to date. Our data supported the independent association of subclinical hypothyroidism with diabetic nephropathy, calling for further investigations to evaluate their longitudinal associations.