Endothelial progenitor cells (EPCs), critical for mediating vascular repair, are dysfunctional in a hyperglycemic and/or hypercholesterolemic environment. Their dysfunction contributes to the progression of diabetic macro- and microvascular complications. Activation of “cholesterol-sensing” nuclear receptors, the liver X receptors (LXRα/LXRβ), protects against atherosclerosis by transcriptional regulation of genes important in promoting cholesterol efflux and inhibiting inflammation. We hypothesized that LXR activation with a synthetic ligand would correct diabetes-induced EPC dysfunction and improve diabetic retinopathy. Studies were performed in streptozotocin (STZ)-injected DBA/2J mice fed a high-fat Western diet (DBA/STZ/WD) and treated with the LXR agonist GW3965 and in LXRα^−/−, LXRβ^−/−, and LXRα/β^−/− mice. Retinas were evaluated for number of acellular capillaries and glial fibrillary acidic protein (GFAP) immunoreactivity. Bone marrow EPCs were analyzed for migratory function and gene expression. Compared with vehicle-treated DBA/STZ/WD mice, GW3965 treated mice showed fewer acellular capillaries and reduced GFAP expression. These mice also exhibited enhanced EPC migration and restoration of inflammatory and oxidative stress genes toward nondiabetic levels. LXRα^−/−, LXRβ^−/−, and LXRα/β^−/− mice developed acellular capillaries and EPC dysfunction similar to the DBA/STZ/WD mice. These studies support a key role for LXR in retinal and bone marrow progenitor dysfunction associated with type 1 diabetes. LXR agonists may represent promising pharmacologic targets for correcting retinopathy and EPC dysfunction.