Aims: To determine the magnitude of the association between abdominal adiposity and low-grade inflammation in persons with recently diagnosed type 2 diabetes (T2D) and to determine to what extent this association is mediated by low physical activity level, hyperinsulinaemia, hyperglycaemia, dyslipidaemia, hypertension, and comorbidities. Materials and Methods: We measured waist circumference, clinical characteristics, and inflammatory markers i.e. tumour necrosis factor-alpha (TNF-α), interleukin-6 (IL-6), and high-sensitivity C-reactive protein (hsCRP), in >9000 persons with recently diagnosed T2D. We applied multiple mediation analysis using structural equation modelling, with adjustment for age and sex. Results: Waist circumference as a proxy for abdominal adiposity was positively associated with all inflammatory markers. Hence, a one-standard deviation (SD) increase in waist circumference (SD = 15 cm) was associated with a 22%, 35%, and 46% SD increase in TNF-α (SD = 1.5 pg/mL), IL-6 (SD = 4.4 pg/mL), and hsCRP (SD = 6.9 mg/L), respectively. The level of hyperinsulinaemia assessed by fasting C-peptide was quantitatively the most important mediator, accounting for 9%–25% of the association between abdominal adiposity and low-grade inflammation, followed by low physical activity (5%–7%) and high triglyceride levels (2%–6%). Although mediation of adiposity-induced inflammation by greater comorbidity and higher glycated haemoglobin levels reached statistical significance, their impact was minor (1%–2%). Conclusions: In persons with recently diagnosed T2D, there was a clear association between abdominal adiposity and low-grade inflammation. A considerable part (20%–40%) of this association was mediated by other factors, with hyperinsulinaemia as a potentially important driver of adiposity-induced inflammation in T2D.