Blocking the protein prevents kidney damage associated with diabetes in rats and mice, the study also found.
Edinburgh University scientists said the findings could lead to new therapies.
Diabetes results in high levels of blood sugar and affects 415 million people globally. It is the leading cause of kidney failure.
About 40% of people with diabetes eventually develop kidney disease.
The protein, called P2X7R, plays an important role in inflammation and the immune system and has previously been linked to kidney diseases not associated with diabetes.
This is the first time it has been shown to cause diabetic kidney disease.
The researchers found high P2X7R levels in kidney biopsies from people with diabetes, while it was almost undetectable in biopsies from people without diabetes.
Higher P2X7R was linked to poor kidney function and increased tissue scarring.
In follow-up experiments, mice lacking the gene that makes P2X7R did not develop kidney scarring in response to diabetes, suggesting that damage could be prevented, the scientists said.
The researchers also showed a drug that blocks P2X7R reduces high levels of infiltrating kidney macrophages, a hallmark of diabetic kidney disease, in diabetic rats.
The scientists have hailed this as a significant advance in the search for treatments.
Dr Robert Menzies, British Heart Foundation immediate fellow at Edinburgh University, said: "Diabetic kidney disease is reaching epidemic levels, but we are still searching for that blockbuster drug to help patients.
"This study is a major advance in understanding how kidney damage occurs in diabetes and where we might focus our efforts in finding a treatment.
"Our next studies are being designed to determine if the P2X7R-blocking drug, which is already known to be safe in humans, could reverse more severe kidney damage or even prevent it. These studies are a very encouraging move forward."
The study, carried out in collaboration with UCL and Imperial College London, was supported by the Medical Research Council and Kidney Research UK, with findings published in the journal EBioMedicine.
Elaine Davies, director of research operations at Kidney Research UK, said: "With diabetes representing the most significant risk factor for developing kidney disease, we welcome this important step forward in our understanding of the mechanism behind diabetic kidney disease.
"We look forward to hearing about how this study develops."