Cambrian fossil Lagerstätten preserving soft-bodied organisms have contributed much towards our understanding of metazoan origins. Lobopodians are a particularly interesting group that diversified and flourished in the Cambrian seas. Resembling 'worms with legs', they have long attracted much attention in that they may have given rise to both Onychophora (velvet worms) and Tardigrada (water bears), as well as to arthropods in general. Here we describe Diania cactiformis gen. et sp. nov. as an 'armoured' lobopodian from the Chengjiang fossil Lagerstätte (Cambrian Stage 3), Yunnan, southwestern China. Although sharing features with other typical lobopodians, it is remarkable for possessing robust and probably sclerotized appendages, with what appear to be articulated elements. In terms of limb morphology it is therefore closer to the arthropod condition, to our knowledge, than any lobopodian recorded until now. Phylogenetic analysis recovers it in a derived position, close to Arthropoda; thus, it seems to belong to a grade of organization close to the point of becoming a true arthropod. Further, D. cactiformis could imply that arthropodization (sclerotization of the limbs) preceded arthrodization (sclerotization of the body). Comparing our fossils with other lobopodian appendage morphologies--see Kerygmachela, Jianshanopodia and Megadictyon--reinforces the hypothesis that the group as a whole is paraphyletic, with different taxa expressing different grades of arthropodization.