Objective Inflammation and fibrosis are essential promoters in the pathogenesis of diabetic nephropathy (DN) in type 2 diabetes. The present study examined the anti-inflammation and anti-fibrosis effect of Tangshen Formula (TSF), a traditional Chinese medicine, on DN. Research Design and Methods Protective role of TSF in DN was examined in a rat model of type 2 DN that was established by high-fat diet-fed and low-dose-streptozotocin injection. TSF was suspended in 0.5% CMC-Na solution and delivered by oral gavage at a dosage of 1.67g/Kg body weight/day. The therapeutic effects and mechanisms of TSF on diabetic kidney injury were examined. Results We found that TSF treatment for 20 weeks attenuated DN by significantly inhibiting urinary excretion of albumin and renal histological injuries. These beneficial effects were associated with an inactivation of NF-kappa B signaling, thereby blocking the upregulation of pro-inflammatory cytokines (IL-1 beta, TNF alpha), chemokine (MCP-1), and macrophage infiltration in the TSF-treated rats with type 2 DN. In addition, TSF treatment also inactivated TGF-beta/Smad3 signaling and therefore suppressed renal fibrosis including expressions of fibronectin, collagen I, and collagen IV. Further studies revealed that the inhibitory effect of TSF on TGF-beta/Smad3 and NF-kappa B signaling in DN was associated with inhibition of Smurf2-dependent ubiquitin degradation of Smad7. Conclusions The present study reveals that TSF has therapeutic potential for type 2 DN in rats. Blockade of NF-kappa B-driven renal inflammation and TGF-beta/Smad3-mediated renal fibrosis by preventing the Smurf2-mediated Smad7 degradation pathway may be mechanisms through which TSF inhibits type 2 DN.