Background: Body mass index (BMI) is a key covariate in the study of type 2 diabetes, but can also be theorized as a contextual effect. The purpose of this study was to explore the extent to which variation in individual risk factors and neighbourhood BMI explain the variation in type 2 diabetes prevalence across neighbourhoods and municipalities. Methods: Cross-sectional data were collected from 137 820 adults aged ≥18 years from 3296 neighbourhoods in 296 municipalities in the Northern Netherlands. The odds of type 2 diabetes was assessed using a multilevel model. Median odds ratios were calculated and choropleth maps were created to visually assess neighbourhood variation in type 2 diabetes prevalence. Results: The overall prevalence of type 2 diabetes was 4%, ranging from 0 to ≥10 and 0-7% across neighbourhoods and municipalities, respectively. Of the regional variation, 67.0 and 71.6% is explained through variation of individual risk factors at the neighbourhood and municipality level, respectively. Analysis on the smallest spatial scale, i.e. the neighbourhood, best captured the regional variance. Statistically significant interaction between individual and neighbourhood BMI was found (OR = 1.06; 95% CI = 1.03-1.08, P for interaction < 0.001), adjusted for the individual risk profile. Conclusion: The results suggest a more cautious interpretation of neighbourhood effects in type 2 diabetes is warranted, and reveals the need for further investigation into risk-prone groups to guide the design of community-level interventions to halt the rise in type 2 diabetes prevalence.