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Diabetic retinopathy is predominantly caused by vascular endothelial growth factor (VEGF)-induced microvascular leakage; however, the underlying mechanism is unclear. Here, we demonstrated that hyperglycemia induced microvascular leakage by activating TGase2 and this vascular leakage was inhibited by C-peptide in diabetic retina. VEGF elevated TGase2 activity through sequential elevation of intracellular Ca2+ and reactive oxygen species (ROS) levels in endothelial cells. TGase inhibitors or TGase2 siRNA prevented VEGF-induced stress fiber formation and VE-cadherin disruption, which play a critical role in modulating endothelial permeability. C-peptide inhibited the VEGF-induced ROS generation, stress fiber formation, and disassembly of vascular endothelial cadherin in endothelial cells. Intravitreal injection of C-peptide, TGase inhibitors, or TGase2 siRNA successfully inhibited hyperglycemia-induced TGase activation and microvascular leakage in the retinas of diabetic mice. Thus, our findings suggest that C-peptide prevents VEGF-induced microvascular permeability by inhibiting ROS-mediated activation of TG2 in diabetic mice.