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Elevated erythropoietin (EPO) levels have been reported to predict poor survival in various populations including diabetic patients. However, data regarding its impact on renal outcomes are scarce. We conducted a single-center, prospective cohort study of 339 type 2 diabetic patients with anemia. The primary outcome was the estimated glomerular filtration rate (eGFR) slope for two years. We performed multiple linear regression and restricted cubic spline analyses to assess the association of serum EPO levels with the renal outcome. Chronic kidney disease (CKD) was defined as eGFR 30 mg/g creatinine. Median baseline EPO and eGFR level were 14.4 IU/L and 53 mL/min/1.73 m2, respectively. Inappropriately low EPO levels were observed in 73% of anemic patients and 59% of anemic patients even without CKD, suggesting that EPO deficiency precedes the onset of CKD in diabetes mellitus. Multivariable analysis revealed that iron status and hemoglobin levels were major determinants of EPO levels. Median eGFR slope was −1.3 mL/min/1.73 m2/year. We found that low EPO levels, but not low hemoglobin levels, were associated with a faster decline in eGFR, independent of clinically relevant factors. The eGFR decline was steeper, particularly when the EPO level was below the upper limit of normal. Lower EPO concentrations were associated with rapid eGFR decline, especially in patients with iron deficiency (P for interaction = 0.01). Relative EPO deficiency should be considered as a culprit in anemia of unknown etiology in diabetic patients, even those without CKD. Low EPO levels, especially when accompanied by poor iron status, are predictive of rapid loss of renal function.