Diabetic neuropathy is associated with disturbances in endoneurial metabolism and microvascular morphology, but the roles of these factors in the aetiopathogenesis of diabetic neuropathy remain unclear. Changes in endoneurial capillary morphology and vascular reactivity apparently predate the development of diabetic neuropathy in humans, and in manifest neuropathy, reductions in nerve conduction velocity correlate with the level of endoneurial hypoxia. The idea that microvascular changes cause diabetic neuropathy is contradicted, however, by reports of elevated endoneurial blood flow in early experimental diabetes, and of unaffected blood flow when early histological signs of neuropathy first develop in humans. We recently showed that disturbances in capillary flow patterns, so-called capillary dysfunction, can reduce the amount of oxygen and glucose that can be extracted by the tissue for a given blood flow. In fact, tissue blood flow must be adjusted to ensure sufficient oxygen extraction as capillary dysfunction becomes more severe, thereby changing the normal relationship between tissue oxygenation and blood flow. This review examines the evidence of capillary dysfunction in diabetic neuropathy, and whether the observed relation between endoneurial blood flow and nerve function is consistent with increasingly disturbed capillary flow patterns. The analysis suggests testable relations between capillary dysfunction, tissue hypoxia, aldose reductase activity, oxidative stress, tissue inflammation and glucose clearance from blood. We discuss the implications of these predictions in relation to the prevention and management of diabetic complications in type 1 and type 2 diabetes, and suggest ways of testing these hypotheses in experimental and clinical settings.