Background. The relationship between presence of diabetes and adverse neighborhood and housing conditions and their effect on functional decline is unclear. We examined the association of adverse neighborhood (block face) and housing conditions with incidence of lower-body functional limitations among persons with and those without diabetes using a prospective population-based cohort study of 563 African Americans 49-65 years of age at their 2000-2001 baseline interviews. Methods. Participants were randomly sampled African Americans living in the St. Louis area (response rate: 76%). Physician-diagnosed diabetes was self reported at baseline interview. Lower-body functional limitations were self reported based on the Nagi physical performance scale at baseline and the three-year follow-up interviews. The external appearance of the block the respondent lived on and five housing conditions were rated by study interviewers. All analyses were done using propensity score methods to control for confounders. Results. 109 (19.4%) of subjects experienced incident lower-body functional limitations at three-year follow-up. In adjusted analysis, persons with diabetes who lived on block faces rated as fair-poor on each of the five conditions had higher odds (7.79 [95% confidence interval: 1.36-37.55] to 144.6 [95% confidence interval: 4.45-775.53]) of developing lower-body functional limitations than the referent group of persons without diabetes who lived on block faces rated as good-excellent. At least 80 percent of incident lower-body functional limitations was attributable to the interaction between block face conditions and diabetes status. Conclusions. Adverse neighborhood conditions appear to exacerbate the detrimental effects on lower-body functioning associated with diabetes.