Diabetic nephropathy (DN) is characterized by an early, progressive expansion and sclerosis of the glomerular mesangium leading to glomerulosclerosis. This is associated with parallel fibrosis of the renal interstitium. In experimental renal scarring, the protein cross-linking enzyme, tissue transglutaminase (tTg), is up-regulated and externalized causing an increase in its crosslink product, epsilon-(gamma-glutamyl)-lysine, in the extracellular space. This potentially contributes to the extracellular matrix (ECM) accumulation central to tissue fibrosis by increasing deposition and inhibiting breakdown. We investigated if a similar mechanism may contribute to the ECM expansion characteristic of DN using the rat streptozotocin model over 120 days. Whole kidney epsilon-(gamma-glutamyl)-lysine (HPLC analysis) was significantly increased from Day 90 (+337%) and peaked at Day 120 (+650%) (p < 0.05). Immunofluorescence showed this increase to be predominantly extracellular in the peritubular interstitial space, but also in individual glomeruli. Total kidney transglutaminase (Tg) was not elevated. However, using a Tg in situ activity assay, increased Tg was detected in both the extracellular interstitial space and glomeruli by Day 60, with a maximal 53% increase at Day 120 (p < 0.05). Using a specific anti-tTg antibody, immunohistochemistry showed a similar increase in extracellular enzyme in the interstitium and glomeruli. To biochemically characterize glomerular changes, glomeruli were isolated by selective sieving. In line with whole kidney measurement, there was an increase in glomerular epsilon-(gamma-glutamyl) lysine (+361%); however, in the glomeruli this was associated with increases in Tg activity (+228%) and tTg antigen by Western blotting (+215%). Importantly, the ratio of glomerular epsilon-(gamma-glutamyl) lysine to hydroxyproline increased by 2.2-fold. In DN, changes in the kidney result in increased translocation of tTg to the extracellular environment where high Ca(2+) and low GTP levels allow its activation. In the tubulointerstitium this is independent of increased tTg production, but dependent in the glomerulus. This leads to excessive ECM cross-linking, contributing to the renal fibrosis characteristic of progressive DN.