In studies it lowered blood glucose levels and reversed insulin resistance in mice with Type 2 diabetes.
Researchers from the Institute of Comparative Medicine at Yangzhou University in China said the findings suggested the same therapy could now be introduced as an effective anti-diabetic treatment for humans.
They said it would be particularly suitable for patients with both diabetes and rheumatoid arthritis.
The findings could offer an exciting alternative to current treatments for Type 2 diabetes.
Four million people in the UK have diabetes, with 90 per cent suffering from Type 2.
Type 1 is an auto-immune disease which cannot currently be cured.
But Type 2 can be avoided by making lifestyle changes such as more exercise and a healthier diet.
Experts warn Britain is sitting on a diabetes time bomb with the number of prescriptions for Type 2 sufferers rising by a third in five years to 35 million.
And an estimated 550,000 people have Type 2 but are unaware of it. Last night, research bodies welcomed the new study, but stressed more examination of the drug’s effects was still needed.
Dr Emily Burns from Diabetes UK said: “Much more research is needed before we’ll know if this arthritis drug could be used to help people with Type 2 diabetes to manage their condition in the future.
“Meanwhile, there are many drugs available for controlling blood sugar levels. Anyone with Type 2 diabetes concerned about medication should speak to a health professional.”
Rheumatoid arthritis, affecting approximately one per cent of the worldwide population, is a chronic auto-immune condition that causes pain and swelling in the joints.
The anti-inflammatory drug leflunomide has long been approved to treat the condition.
Previous clinical studies have noted that patients taking the drug tended to have lower blood glucose levels and that obese patients lost weight.
In the new study lead author Prof Xuilong Xu and colleagues discovered that leflunomide not only normalised blood glucose levels, but caused cells to start responding to insulin again.
However, they added that leflunomide also acted on other molecular targets in the body. This suggested more studies were needed to confirm exactly what was causing the drug’s anti-diabetic effects.
Professor Xu’s team now plans to conduct further clinical trials to test if the anti-diabetic effect of leflunomide also occurs in humans as well as mice.