Objective. To investigate the association of thyroid function and diabetic nephropathy (DN) in euthyroid patients with type 2 diabetes. Methods. A total of 421 patients were included in this cross-sectional study. The following parameters were assessed: anthropometric measurements, fast plasma glucose, serum creatinine, lipid profile, HbA1c, free triiodothyronine (FT3), free thyroxine, thyroid-stimulating hormone levels, and urinary albumin-to-creatinine ratio (UACR). Patients with UACR of ≥30 mg/g were defined as those suffering from DN. Results. Of the 421 patients, 203 (48.2%) suffered from DN, and no difference was found between males and females. The patients with DN yielded significantly lower FT3 levels than those without DN (P < 0.01). The prevalence of DN showed a significantly decreasing trend across the three tertiles based on FT3 levels (59.6%, 46.4%, and 38.6%, P < 0.01). After adjustment for gender and age, FT3 levels were found to correlate positively with estimated glomerular filtration rate (P = 0.03) and negatively with UACR (P < 0.01). Multiple linear regression analysis showed that FT3 level was independently associated with UACR (β = -0.18, t = -3.70, and P < 0.01). Conclusion. Serum FT3 levels are inversely associated with DN in euthyroid patients with type 2 diabetes, independent of traditional risk factors.