Purpose Diabetic kidney disease (DKD) is the most common complication of type 2 diabetes mellitus (T2DM), and its pathogenesis is not yet fully understood and lacks noninvasive and effective diagnostic biomarkers. In this study, we performed urine metabolomics to identify biomarkers for DKD and to clarify the potential mechanisms associated with disease progression. Methods We applied a liquid chromatography-mass spectrometry-based metabolomics method combined with bioinformatics analysis to investigate the urine metabolism characteristics of 79 participants, including healthy subjects (n = 20), T2DM patients (n = 20), 39 DKD patients that included 19 DKD with microalbuminuria (DKD + micro) and 20 DKD with macroalbuminuria (DKD + macro). Results Seventeen metabolites were identified between T2DM and DKD that were involved in amino acid, purine, nucleotide and primarily bile acid metabolism. Ultimately, a combined model consisting of 2 metabolites (tyramine and phenylalanylproline) was established, which had optimal diagnostic performance (area under the curve (AUC) = 0.94). We also identified 19 metabolites that were co-expressed within the DKD groups and 41 metabolites specifically expressed in the DKD + macro group. Ingenuity pathway analysis revealed three interaction networks of these 60 metabolites, involving the sirtuin signaling pathway and ferroptosis signaling pathway, as well as the downregulation of organic anion transporter 1, which may be important mechanisms that mediate the progression of DKD. Conclusions This work reveals the metabolic alterations in T2DM and DKD, constructs a combined model to distinguish them and delivers a novel strategy for studying the underlying mechanism and treatment of DKD.