Anxiety and depression are more common among females and those experiencing diabetes and menopause. Menopausal symptoms experienced by women can vary tremendously from population to population; therefore, there is a need to investigate these symptoms and associated risk factors in different communities. This study investigated the differences in psychological health and menopause-specific quality of life (MENQOL) between women with and without diabetes type 2 (T2DM) in Malaysia. Women with T2DM (n = 320) were matched by age range to controls without T2DM (n = 320). Data were collected from March 2012 to January 2013. Delusions Symptoms States Inventory (DSSI) instrument was used to identify symptoms of depression and anxiety. Women with diabetes had higher depressive (11.8% versus 8.4%) and anxiety (8.4% versus 6.6%) symptoms compared to women without diabetes. In both groups, the most common menopausal symptom was aches (muscles and joints). Women without diabetes had significantly higher scores for the sexual domain compared to women with diabetes (4.20 versus 3.21, p = 0.001). The odds that a postmenopausal woman with diabetes was depressed or anxious on the DSSI scale increased significantly when the MENQOL score on the physical, vasomotor, and psychosocial domains increased by one unit. Both diabetes and psychological problems have negative impact on MENQOL. Our findings support the view of screening postmenopausal women with diabetes for depressive and anxiety, to improve overall quality of life.