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Dry eye is the most common ocular surface disorder that is increasingly acknowledged to be associated with diabetes mellitus. Via metabolic dysregulation and neural injury, diabetes mellitus significantly increases the prevalence of dry eye, adversely affecting patients' quality of life. At present, the diagnosis and treatment of diabetic dry eye are still facing challenges in clinical practice. This article outlines the prevalence and risk factors associated with diabetic dry eye, explores its underlying pathogenic mechanisms, such as advanced glycation end-product accumulation, oxidative stress, corneal neuropathy, and impaired neural regulation, which collectively disrupt the lacrimal functional unit, leading to reduced tear secretion and tear film instability. The clinical manifestations of diabetic dry eye are also reviewed. According to current literature, diagnostic strategies utilizing confocal microscopy and tear fluid biomarkers are proposed. In addition, this review summarizes recent therapeutic advances and potential intervention strategies for diabetic dry eye, with a focus on emerging mechanism-based treatments. Taken together, this review aims to advance research on diabetic dry eye and offer novel insights to support early diagnosis and precision therapy.