Diabetic encephalopathy (DE) is one of the severe complications in patients with diabetes mellitus. Paeonol, an active compound isolated from the root bark of Paeonia suffruticosa, has significant antidiabetic activity in vivo. However, its underlying beneficial effects on DE were unclear. In the present study, the protective activity of paeonol on DE was evaluated in streptozotocin (STZ)-induced diabetic rats. Paeonol at 50 and 100 mg/kg significantly increased body weight and decreased blood glucose levels, glycosylated serum proteins, and serum advanced glycation end products (AGEs) levels. Immunohistochemistry assays and Western blot analysis revealed a significant decrease in expressions on receptor for advanced glycation end products (RAGE) and nuclear factor kappa B (NF-κB) in hippocampus and cerebral cortical neurons after paeonol treatment. Furthermore, paeonol significantly increased glutathione content and remarkedly decreased induced nitric oxide synthase activity in hippocampus tissue. Our findings indicated that paeonol could improve the pathological damage of DE in STZ-induced diabetic rats. It might be associated with the modulating AGEs/RAGE/NF-κB pathway. This study suggested that paeonol might be a promising candidate for the prevention and treatment of DE.