OBJECTIVE - Age, diabetes, and elevated inflammatory markers independently increase the risk of functional decline. We examined the effect of C-reactive protein (CRP) and interleukin-6 (IL-6) on the incident mobility limitation in older adults with and without diabetes. RESEARCH DESIGN AND METHODS - We analyzed data from a cohort of 2,895 well-functioning adults aged 70-79 years, followed for development of persistent functional limitation over 3.5 years. Participants were assessed for the presence of diabetes according to fasting glucose and/or hypoglycemic medication use and were divided into three equal groups (tertiles) according to level of CRP or IL-6. Persistent functional limitation was defined as difficulty climbing 10 steps or walking one-quarter mile on two consecutive semiannual assessments. RESULTS - At baseline, 702 participants (24%) had diabetes. CRP values were (median ± SD) 2.8 ± 4.4 versus 3.7 ± 5.4 for those with normal glucose and diabetes, respectively (P < 0.001). The unadjusted incidence of functional limitation associated with increased levels of CRP and IL-6 was greater among participants with diabetes. After adjusting for clinical and demographic covariates, persistent functional limitation for the highest tertile was greater compared with that for the lowest tertile of CRP or IL-6 for those with and without diabetes. CRP hazard ratios (HRs) were 1.7 (95% CI 1.2-2.3) versus 1.4 (1.1-1.6), respectively. IL-6 HRs were 1.8 (1.3-2.5) versus 1.6 (1.4-2.0), respectively. CONCLUSIONS - In initially high-functioning older adults, those with diabetes and higher inflammatory burden had an increased risk of functional decline. Interventions at early stages to reduce inflammation may preserve function in these individuals.