Our previous study found that large-leaf yellow tea (LYT) had interesting hypoglycemic activity in high-fat diet-induced obese mice and highly safety in healthy mice. To study the anti-diabetic potential of LYT, the present study further investigated the preventive effects and mechanisms of action of LYT administration on diabetes and diabetic nephropathy in high-fat diet plus streptozotocin-induced diabetic mice. Results showed that LYT infusions (1/100 and 1/50, m/V) as drinking fluid for 4 weeks reduced diabetic polydipsia and polyuria, enhanced glucose tolerance and insulin sensitivity, and lowered fasting blood glucose level. The underlying mechanisms involve downregulation of gluconeogenesis (lower protein levels of TXNIP and FBP and enzyme activity of FBP), upregulation of lipid catabolism (higher protein levels of CPT-1α and PPARα), downregulation of lipogenesis (lower protein level of SREBP-1), and modification of the structure and abundance of gut microbiota to modulate metabolic homeostasis. Moreover, LYT administration prevented diabetic nephropathy, possibly due to reduced glucose-caused osmotic diuresis and lowered levels of renal PKC-β2, NLRP3 as well as membrane PKC-α, AQP2 and glycosylated AQP2 proteins. Taken together, LYT exhibits the activities in alleviating diabetic symptoms, ameliorating glucose and lipid dysmetabolism and fatty liver, and preventing diabetic nephropathy in diabetic mice. These activities may be explored for the prevention and treatment of diabetes in humans.