Diabetic neuropathy results from progressive nerve fibre damage with blunted nerve regeneration and repair and may be complicated by nerve hyperexcitability resulting in pain. The naturally occurring amino acid taurine functions as an osmolyte, inhibitory neurotransmitter, and modulator of pain perception. It is also known to have neurotrophic actions. The compatible osmolyte hypothesis proposes that levels of intracellular organic osmolytes including taurine and myo-inositol, respond co-ordinately in response to changes in intracellular sorbitol or external osmolality to maintain the intracellular milieu. We hypothesize that glucose-induced sorbitol accumulation in diabetes mellitus will result in taurine depletion in peripheral nerve which may potentially impair nerve regeneration and precipitate neuronal hyperexcitability and pain. This study explored the relationships of taurine, myo-inositol and sorbitol in the rat nerve and their effects on nerve conduction velocity. Osmolyte levels and nerve conduction velocity were determined in sciatic nerve from non-diabetic and streptozotocin-induced diabetic rats, with or without dietary taurine or myo-inositol supplementation. Taurine levels decreased by 31% (p < 0.01) and myo-inositol decreased by 37% (p < 0.05) in diabetic nerve as sorbitol accumulated. Taurine supplementation of diabetic animals did not affect nerve conduction velocity but further reduced nerve myo-inositol levels. Prevention of sorbitol accumulation with the aldose reductase inhibitor sorbinil increased nerve taurine levels by 22% (p < 0.05) when compared with untreated diabetic animals. Thus, we have demonstrated an interdependence of organic osmolytes within the nerve. Abnormal accumulation of one osmolyte results in reciprocal depletion of others. Diabetic neuropathy may be an example of maladaptive osmoregulation, nerve damage and instability being aggravated by taurine depletion.