Prospective data directly investigating the role of endogenous sex hormones in diabetes risk have been scant, particularly in women. We aimed to examine comprehensively plasma sex hormones in connection with risk of developing type 2 diabetes in postmenopausal women. We conducted a prospective, nested case-control study of plasma oestradiol, testosterone and dehydroepiandrosterone sulfate and risk of type 2 diabetes in a cohort of women health professionals with a mean age of 60.3 and 12.2 years since menopause. Among women not using hormone therapy and free of baseline cardiovascular disease, cancer and diabetes, 359 incident cases of type 2 diabetes were matched with 359 controls during an average follow-up of 10 years. Oestradiol and testosterone were each strongly and positively associated with risk of type 2 diabetes. After adjustment for BMI, family history, lifestyle and reproductive variables, the multivariable relative risks (95% CI) comparing the highest vs lowest quintile were 12.6 (2.83-56.3) for total oestradiol (p = 0.002 for trend), 13.1 (4.18-40.8) for free oestradiol (p < 0.001 for trend), 4.15 (1.21-14.2) for total testosterone (p = 0.019 for trend) and 14.8 (4.44-49.2) for free testosterone (p < 0.001 for trend). These associations remained robust after adjusting and accounting for other metabolic syndrome components and baseline HbA(1c) levels. In postmenopausal women, higher plasma levels of oestradiol and testosterone were strongly and prospectively related to increased risk of developing type 2 diabetes. These prospective data indicate that endogenous levels of sex hormones may play important roles in the pathogenesis of type 2 diabetes. ClinicalTrials.gov ID no.: NCT00000479.