In an increasingly aging and overweight population, osteoporosis and type 2 diabetes (T2DM) are major public health concerns. T2DM patients experience prejudicial effects on their bone health, affecting their physical capacity. Exercise in hypoxia (EH) and a low-carbohydrate diet (LCD) have been suggested for therapeutic benefits in T2DM, improving bone mineral content (BMC) and glycemic control. This study investigated the effects of EH combined with an LCD on body composition and functional and physiologic capacity in T2DM patients. Older T2DM patients (n = 42) were randomly assigned to the following groups: (1) control group: control diet + exercise in normoxia; (2) EH group: control diet + EH; (3) intervention group: LCD + EH. Cardiopulmonary tests (BRUCE protocol), body composition (DEXA), and functional capacity (6MWT, handgrip strength) were evaluated. Body mass index (kg/m2) and body fat (%) decreased in all groups (p < 0.001). BMC (kg) increased in all groups (p < 0.001) and was significantly higher in the EH and EH + LCD groups (p < 0.001). VO2peak improved in all groups (p < 0.001), but more so in the hypoxia groups (p = 0.019). Functional capacity was increased in all groups (p < 0.001), but more so in the EH group in 6MWT (p = 0.030). EH with and without an LCD is a therapeutic strategy for improving bone mass in T2DM, which is associated with cardiorespiratory and functional improvements.