Diabetic retinopathy is an important cause of blindness in the adult population1,2 and is characterized by a progressive loss of vascular cells and slow dissolution of inter-vascular junctions resulting in vascular leak and retinal edema3. Later stages of the disease are characterized by inflammatory cell infiltration, tissue destruction and neovascularization4,5. Here we identify the soluble epoxide hydrolase (sEH) as a key enzyme that initiates the pericyte “drop off” and loss of endothelial barrier function by generating a diol from docosahexaenoic acid (DHA) i.e. 19,20-dihydroxydocosapentaenoic acid (19,20-DHDP). The expression of the sEH and the accumulation of 19,20-DHDP were elevated in diabetic murine and human retinas as well as in human vitreous. Mechanistically, the diol targeted the cell membrane to alter the localisation of cholesterol-binding proteins, and interfered with the association of presenilin 1 (PS1) with N-cadherin and VE-cadherin to compromise pericyte-endothelial cell as well as inter-endothelial cell junctions. Treating diabetic mice with a specific sEH inhibitor prevented the pericyte loss and vascular permeability that are characteristic of non-proliferative diabetic retinopathy. Overexpression of the sEH in the retinal Müller glial cells of non-diabetic mice, on the other hand, resulted in vessel abnormalities similar to those seen in diabetic animals with retinopathy. Thus, increased expression of the sEH is a determinant event in the pathogenesis of diabetic retinopathy and sEH inhibition can prevent the progression of the disease.