Although heart disease due to diabetes is mainly associated with complications of the large vessels, microvascular abnormalities are also considered to be involved in altering cardiac structure and function. Three major defects, such as endothelial dysfunction, alteration in the production/release of hormones, and shift in metabolism of smooth muscle cells, have been suggested to produce damage to the small arteries and capillaries (microangiopathy) due to hyperglycemia, and promote the development of diabetic cardiomyopathy. These factors may either act alone or in combination to produce oxidative stress as well as changes in cellular signaling and gene transcription, which in turn cause vasoconstriction and structural remodeling of the coronary vessels. Such alterations in microvasculature produce hypoperfusion of the myocardium and thereby lower the energy status resulting in changes in Ca(2+)-handling, apoptosis, and decreased cardiac contractile force. This article discusses diabetes-induced mechanisms of microvascular damage leading to cardiac dysfunction that is characterized by myocardial dilatation, cardiac hypertrophy as well as early diastolic and late systolic defects. Metabolic defects and changes in neurohumoral system due to diabetes, which promote disturbances in vascular homeostasis, are highlighted. In addition, increase in the vulnerability of the diabetic heart to the development of heart failure and the signaling pathways integrating nuclear factor κB and protein kinase C in diabetic cardiomyopathy are also described for comparison.