Higher body mass index (BMI) is a well-established risk factor for type 2 diabetes, and rates of obesity and type 2 diabetes are substantially higher among Mexican-Americans relative to non-Hispanic European Americans. Mexican-Americans are genetically diverse, with a highly variable distribution of Native American, European, and African ancestries. Here, we evaluate the role of Native American ancestry on BMI and diabetes risk in a well-defined Mexican-American population. Participants were randomly selected among individuals residing in the Houston area who are enrolled in the Mexican-American Cohort study. Using a custom Illumina GoldenGate Panel, we genotyped DNA from 4,662 cohort participants for 87 Ancestry-Informative Markers. On average, the participants were of 50.2% Native American ancestry, 42.7% European ancestry and 7.1% African ancestry. Using multivariate linear regression, we found BMI and Native American ancestry were inversely correlated; individuals with <20% Native American ancestry were 2.5 times more likely to be severely obese compared to those with >80% Native American ancestry. Furthermore, we demonstrated an interaction between BMI and Native American ancestry in diabetes risk among women; Native American ancestry was a strong risk factor for diabetes only among overweight and obese women (OR = 1.190 for each 10% increase in Native American ancestry). This study offers new insight into the complex relationship between obesity, genetic ancestry, and their respective effects on diabetes risk. Findings from this study may improve the diabetes risk prediction among Mexican-American individuals thereby facilitating targeted prevention strategies.