Endoneurial hypoxia and a high frequency of closed capillaries have been found in chronic experimental diabetes and human diabetic sural nerve, respectively. These findings have led to the hypothesis that the pathogenesis of diabetic neuropathy is due to endoneurial hypoxia. To evaluate the role of endoneurial hypoxia in experimental diabetic neuropathy, the effects of supplementation and deprivation of oxygen on peripheral nerve lipid biosynthesis were studied in normal control and streptozotocin-induced diabetic rats. Defective lipid biosynthesis in diabetic nerve was partially prevented by oxygen supplementation. When normal rats were placed in a hypoxic chamber, lipid abnormalities similar to those observed in diabetic nerves were demonstrated in the absence of changes in nerve free sugars. These findings suggest that endoneurial hypoxia may underlie some key biochemical abnormalities encountered in experimental diabetic neuropathy.