Despite an increasing focus on health literacy in the clinical setting and in the literature, there is still ongoing debate about its influence on diabetes self-management. The aim of the study was to examine the relationships of sociodemographic, clinical, and psychological factors on health literacy and diabetes self-management. A cross-sectional survey was undertaken on 224 patients with type 2 diabetes at two diabetes centres in Sydney, Australia. Findings showed that people with low health literacy were more likely to (a) have lower educational attainment; (b) be migrants; and (c) have depressed mood. Unexpectedly, those who met HbA1c threshold of good glucose control were more likely to have low health literacy. Predictors of low diabetes self-management included (a) younger age group (AOR: 2.58, 95% CI: 1.24-4.64); (b) having postsecondary education (AOR: 2.30, 95% CI: 1.05-5.01); (c) low knowledge of diabetes management (AOR: 2.29, 95% CI: 1.25-4.20); and (d) having depressed mood (AOR: 2.30, 95% CI: 1.30-4.06). The finding that depressed mood predicted both low health literacy and low diabetes self-management stresses the importance of screening for depression. Increasing people's understanding of diabetes self-management and supporting those with depression are crucial to enhance participation in diabetes self-management.