Diabetic nephropathy is currently the most common cause of end-stage renal disease (ESRD) in the western world. A mouse model for diabetic nephropathy that encompasses the salient features of this disease in the kidney is not available. Here, we report that CD1 mice, in contrast to inbred C57BL/6 and 129Sv strains, develop ESRD associated with prominent tubulointerstitial nephritis and fibrosis within 3 months and die because of diabetic complications by 6–7 months after a single injection of streptozotocin. Histopathologic lesions observed in these mice mimic human diabetic nephropathy, including glomerular hypertrophy, diffuse glomerulosclerosis, tubular atrophy, interstitial fibrosis, and decreased renal excretory function. Next, we tested the therapeutic efficacy of bone morphogenic protein-7 (BMP-7) and inhibitors of advanced glycation end products (AGEs), aminoguanidine and pyridoxamine, to inhibit and regress the progression of renal disease in diabetic CD1 mice. We demonstrate that although aminoguanidine, pyridoxamine, and BMP-7 significantly inhibit glomerular lesions, BMP-7 is most effective in the inhibition of tubular inflammation and tubulointerstitial fibrosis in these mice. Collectively, our results report a new mouse model for diabetic nephropathy with prominent interstitial inflammation and fibrosis and the selective inhibition of diabetic kidney disease by AGE inhibitors and BMP-7.