Nitrative stress is thought to be involved in the inflammatory process in COPD airways, and the alveolar nitric oxide concentration (CAlv) has been reported to be increased. However, the CAlv levels are also regulated by gas diffusion at alveolar sites. The aim of the study was to assess the relationship between the CAlv and pulmonary function in COPD patients, while taking into account the lung diffusion capacity. Twenty stable COPD patients (GOLD stage1/2/3/4 = 6/8/6/0) and 16 healthy subjects took part in this cross-sectional study. Fractional exhaled nitric oxide (FENO), CAlv, and pulmonary functions were measured. Pulmonary function, including single nitrogen washout curve (dN2) and diffusion capacity for carbon monoxide (DLCO), was also evaluated in patients with COPD. The mean FENO levels (20.7 ppb versus 16.3 ppb, p < 0.05) and the mean CAlv levels (6.4 ppb versus 4.2 ppb, p < 0.01) in COPD patients were significantly increased compared to those in HS. The CAlv level in COPD was significantly correlated with dN2, %DLCO/alveolar volume (VA). Using the standard entry method of multivariate analysis to adjust for dN2 and %DLCO/VA, dN2 (β = 0.54, p = 0.005) and %DLCO/VA (β = -0.44, p = 0.018) still showed significant correlations with the CAlv levels. These results suggest that the CAlv could be a useful marker for the small airway dysfunction in COPD. Airway inflammation, including excess nitric oxide generation in the peripheral airways, might be related to the pathophysiology of COPD.