Background Depression is common among persons with diabetes and associated with adverse health outcomes. To date, little is known about the causal mechanisms that lead to depression in diabetes. The aim of the present study was to examine to which extent functional and self-rated health mediate the association between physical health and depressive symptoms in diabetes. Methods Data of n = 3222 individuals with type 2 diabetes were analyzed cross- sectionally and longitudinally at three measurement occasions using path analysis. Indicators of physical health were glycemic control, number of comorbid somatic diseases, BMI, and insulin dependence. Furthermore, functional health, self-rated health and depressive symptoms were assessed. Results The effects of physical health on depressive symptoms were largely mediated by functional health and self-rated health. There was only a weak indirect effect of physical health on depressive symptoms. In contrast, self- rated health was a strong direct predictor of depressive symptoms. Self-rated health in turn depended strongly on patients’ functional health. Conclusions The way individuals perceive their health appears to have a stronger effect on their depressive symptoms than objective physical indicators of diabetes. Therefore practitioners should be trained to pay more attention to their patients’ subjective health perceptions.