OBJECTIVE Diabetes mellitus (DM) is a major risk factor for severe coronavirus disease 2019 (COVID-19) for reasons that are unclear. RESEARCH DESIGN AND METHODS We leveraged the International Study of Inflammation in COVID-19 (ISIC), a multicenter observational study of 2,044 patients hospitalized with COVID-19, to characterize the impact of DM on in-hospital outcomes and assess the contribution of inflammation and hyperglycemia to the risk attributed to DM. We measured biomarkers of inflammation collected at hospital admission and collected glucose levels and insulin data throughout hospitalization. The primary outcome was the composite of in-hospital death, need for mechanical ventilation, and need for renal replacement therapy. RESULTS Among participants (mean age 60 years, 58.2% males), those with DM (n = 686, 33.5%) had a significantly higher cumulative incidence of the primary outcome (37.8% vs. 28.6%) and higher levels of inflammatory biomarkers than those without DM. Among biomarkers, DM was only associated with higher soluble urokinase plasminogen activator receptor (suPAR) levels in multivariable analysis. Adjusting for suPAR levels abrogated the association between DM and the primary outcome (adjusted odds ratio 1.23 [95% CI 0.78, 1.37]). In mediation analysis, we estimated the proportion of the effect of DM on the primary outcome mediated by suPAR at 84.2%. Hyperglycemia and higher insulin doses were independent predictors of the primary outcome, with effect sizes unaffected by adjusting for suPAR levels. CONCLUSIONS Our findings suggest that the association between DM and outcomes in COVID-19 is largely mediated by hyperinflammation as assessed by suPAR levels, while the impact of hyperglycemia is independent of inflammation.