Diabetes increases the likelihood of fracture, interferes with fracture healing and impairs angiogenesis. The latter may be significant due to the critical nature of angiogenesis in fracture healing. Although it is known that diabetes interferes with angiogenesis the mechanisms remain poorly defined. We examined fracture healing in normoglycemic and streptozotocin-induced diabetic mice and quantified the degree of angiogenesis with antibodies to three different vascular markers, CD34, CD31 and Factor VIII. The role of diabetes-enhanced inflammation was investigated by treatment of the TNFα-specific inhibitor, pegsunercept starting 10 days after induction of fractures. Diabetes decreased both angiogenesis and VEGFA expression by chondrocytes. The reduced angiogenesis and VEGFA expression in diabetic fractures was rescued by specific inhibition of TNF in vivo. In addition, the TNF inhibitor rescued the negative effect of diabetes on endothelial cell proliferation and endothelial cell apoptosis. The effect of TNFα in vitro was enhanced by high glucose and an advanced glycation endproduct to impair microvascular endothelial cell proliferation and tube formation and to stimulate apoptosis. The effect of TNF, high glucose and an AGE was mediated by the transcription factor FOXO1, which increased expression of p21 and caspase-3. These studies indicate that inflammation plays a major role in diabetes-impaired angiogenesis in endochondral bone formation through its effect on microvascular endothelial cells and FOXO1.