Objectives To assess and compare the effects of candesartan or lisinopril, or both, on blood pressure and urinary albumin excretion in patients with microalbuminuria, hypertension, and type 2 diabetes. Design Prospective, randomised, parallel group, double blind study with four week placebo run in period and 12 weeks' monotherapy with candesartan or lisinopril followed by 12 weeks' monotherapy or combination treatment. Setting Tertiary hospitals and primary care centres in four countries (37 centres). Participants 199 patients aged 30-75 years. Interventions Candesartan 16 mg once daily, lisinopril 20 mg once daily. Main outcome measures Blood pressure and urinary albumin:creatinine ratio. Results At 12 weeks mean (95% confidence interval) reductions in diastolic blood pressure were 9.5 mm Hg (7.7 mm Hg to 11.2 mm Hg, P < 0.001) and 9.7 mm Hg (7.9 mm Hg to 11.5 mm Hg, P < 0.001), respectively, and in urinary albumin:creatinine ratio were 30% (15% to 42%, P < 0.001) and 46% (35% to 56%, P < 0.001) for candesartan and lisinopril, respectively. At 24 weeks the mean reduction in diastolic blood pressure with combination treatment (16.3 mm Hg, 13.6 mm Hg to 18.9 mm Hg, P < 0.001) was significantly greater than that with candesartan (10.4 mm Hg, 7.7 mm Hg to 13.1 mm Hg, P < 0.001) or lisinopril (mean 10.7 mm Hg, 8.0 mm Hg to 13.5 mm Hg, P < 0.001). Furthermore, the reduction in urinary albumin:creatinine ratio with combination treatment (50%, 36% to 61%, P < 0.001) was greater than with candesartan (24%, 0% to 43%, P = 0.05) and lisinopril (39%, 20% to 54%, P < 0.001). All treatments were generally well tolerated. Conclusion Candesartan 16 mg once daily is as effective as lisinopril 20 mg once daily in reducing blood pressure and microalbuminuria in hypertensive patients with type 2 diabetes. Combination treatment is well tolerated and more effective in reducing blood pressure.