ObjectivesPeople with diabetes experience an elevated risk of psychological distress compared with people without diabetes. It is unclear how much of this elevated risk is attributable to the greater levels of physical disability in people with diabetes, and how this risk varies according to sociodemographic and health-behavioural characteristics. This study quantified levels of psychological distress in people with and without diabetes, considering these factors.DesignCross-sectional analysis of questionnaire data.SettingMen and women aged ≥45 years, in the 45 and Up Study, from New South Wales, Australia.Participants236 441 people who completed the baseline postal questionnaire (distributed from 1 January 2006–31 December 2008), with valid data for diabetes status and psychological distress.Primary outcome measuresHigh psychological distress (Kessler-10 >22). Modified Poisson regression with robust error variance was used to estimate prevalence ratios (PRs), comparing prevalence of high psychological distress among those with and without diabetes and across physical functional limitation (PFL) levels, adjusting for potential confounders.ResultsOverall, 8.4% (19 803/236 441) of participants reported diabetes. 11.8% (2339) of individuals with diabetes and 7.2% (15 664) without diabetes had high psychological distress: age-adjusted and sex-adjusted PR=1.89 (95% CI 1.81 to 1.97), becoming 1.58 (1.52 to 1.65) and 1.22 (1.17 to 1.27) following additional adjustment for sociodemographic factors, health behaviours and additionally for PFL, respectively. Compared with individuals with neither diabetes nor PFL, the adjusted PRs for high psychological distress were: 1.37 (1.17 to 1.60) with diabetes but no PFL, 7.33 (7.00 to 7.67) without diabetes but with severe PFL and 8.89 (8.36 to 9.46) with both diabetes and severe PFL.ConclusionsPeople with diabetes have a 60% greater risk of high psychological distress than people without diabetes; a substantial proportion of this elevation is attributable to higher levels of disability with diabetes, especially factoring in measurement error. Psychological distress is strongly related to physical impairment.