Abstract Background Human exposures to inorganic arsenic (iAs) have been linked to an increased risk of diabetes mellitus. Recent laboratory studies showed that methylated trivalent metabolites of iAs may play key roles in the diabetogenic effects of iAs. Our study examined associations between chronic exposure to iAs in drinking water, metabolism of iAs, and prevalence of diabetes in arsenicosis-endemic areas of Mexico. Methods We used fasting blood glucose (FBG), fasting plasma insulin (FPI), oral glucose tolerance test (OGTT), glycated hemoglobin (HbA1c), and insulin resistance (HOMA-IR) to characterize diabetic individuals. Arsenic levels in drinking water and urine were determined to estimate exposure to iAs. Urinary concentrations of iAs and its trivalent and pentavalent methylated metabolites were measured to assess iAs metabolism. Associations between diabetes and iAs exposure or urinary metabolites of iAs were estimated by logistic regression with adjustment for age, sex, hypertension and obesity. Results The prevalence of diabetes was positively associated with iAs in drinking water (OR 1.13 per 10 ppb, p < 0.01) and with the concentration of dimethylarsinite (DMAsIII) in urine (OR 1.24 per inter-quartile range, p = 0.05). Notably, FPI and HOMA-IR were negatively associated with iAs exposure (β -2.08 and -1.64, respectively, p < 0.01), suggesting that the mechanisms of iAs-induced diabetes differ from those underlying type-2 diabetes, which is typically characterized by insulin resistance. Conclusions Our study confirms a previously reported, but frequently questioned, association between exposure to iAs and diabetes, and is the first to link the risk of diabetes to the production of one of the most toxic metabolites of iAs, DMAsIII.