AIM Dysfunction of circulating endothelial progenitor cells (EPCs) has been shown to affect the development of microvascular diseases in diabetes patients. The aim of this study was to elucidate the development and mechanical dysfunction of EPCs in type 2 diabetes (T2D). METHODS The colony-forming capacity of EPCs and differentiation potential of bone marrow (BM) c-Kit(+)/Sca-I(+) lineage-negative mononuclear cells (KSL) were examined in T2D mice, db/db mice and KKAy mice, using EPC colony-forming assay (EPC-CFA). RESULTS T2D mice had fewer BM stem/progenitor cells, and proliferation of KSL was lowest in the BM of db/db mice. In T2D mice, the frequency of large colony-forming units (CFUs) derived from BM-KSL was highly reduced, indicating dysfunction of differentiation into mature EPCs. Only a small number of BM-derived progenitors [CD34(+) KSL cells], which contribute to the supply of EPCs for postnatal neovascularization, was also found. Furthermore, in terms of their plasticity to transdifferentiate into various cell types, BM-KSL exhibited a greater potential to differentiate into granulocyte macrophages (GMs) than into other cell types. CONCLUSION T2D affected EPC colony formation and differentiation of stem cells to mature EPCs or haematopoietic cells. These data suggest opposing regulatory mechanisms for differentiation into mature EPCs and GMs in T2D mice.