Recently, we reported the presence of a local renal aldosterone production. In the present study, we tested the hypothesis that local aldosterone production in the kidney contributes to renal inflammation, matrix formation and albuminuria associated with diabetes. We evaluated changes in renal aldosterone content (RAC), aldosterone synthase expression, nuclear factor κB (NFκB), tumour necrosis factor α (TNFα), interleukin‐6 (IL‐6), transforming growth factor β (TGFβ), glomerular fibronectin, collagen type IV and urinary albumin extraction (UAE) in response to the aldosterone synthase inhibitor FAD286. Studies were conducted in adrenalectomized, normoglycaemic (control) or diabetic rats for 14 weeks. The FAD286 was administered during the last 10 weeks of the study. Plasma aldosterone levels were not detectable in any of the study groups. Compared with control rats, diabetic rats had higher levels of RAC by 488% (P < 0.01), NFκB by 293% (P < 0.01), TNFα by 356% (P < 0.01), IL‐6 by 378% (P < 0.01), TGFβ by 337% (P < 0.01) and UAE by 1122% (P < 0.01), and increased glomerular fibronectin and collagen type IV immunostaining. In diabetic rats, FAD286 reduced RAC (P < 0.01), UAE (P < 0.05), NFκB mRNA, TNFα mRNA, IL‐6 mRNA and TGFβ mRNA by 51, 41, 41 and 52% and also their proteins and decreased glomerular fibronectin and collagen type IV immunostaining. In conclusion, diabetes increases local aldosterone production in the kidney, which contributes to development of renal inflammation, matrix formation and albuminuria. Inhibition of aldosterone production in the kidney could be helpful in management of diabetic nephropathy.