The charity Diabetes UK is funding the project, which aims to give a definitive answer on whether consuming just 800 calories a day can reverse the disease, linked to obesity.
In the UK, around 3.8 million people have either type 1 or type 2 diabetes, with type 2 accounting for about 90% of cases. This figure includes around 850,000 people who have type 2 diabetes but do not know it. As many as seven million more people are at high risk of developing type 2.
The £2.4 million study will be carried out by researchers at Glasgow and Newcastle universities. It will see 140 people with type 2 diabetes spend between eight and 20 weeks consuming 800 calories a day, mainly in the form of liquid formula shakes.
As normal meals are reintroduced, they will learn how to change their lifestyles.
Over a two-year follow-up the results will be compared with 120 people following current recommendations for losing weight.
As well as monitoring the long-term effects of the diet, some participants will have MRI scans to show researchers what is happening inside the body.
A 2011 study in journal Diabetologia found a diet of 600 calories a day could reverse type 2 diabetes in newly diagnosed people.
The Newcastle University study found the low-calorie diet reduced fat levels in the pancreas and liver, which helped insulin production return to normal. Seven out of 11 people studied were free of diabetes three months later.
Diabetes UK is now keen to carry out a larger study with a longer follow-up.
Dr Matthew Hobbs, its head of research, said: "Type 2 diabetes will always be a serious health condition but perhaps it won't always be seen as a condition that people have to manage for the rest of their lives and that worsens inevitably over time.
"The study and evidence from bariatric surgery has shown us that it can be put into remission.
"If we can do this safely, on a bigger scale and as part of routine care, then following a low-calorie liquid diet would be a real game changer in terms of reducing people's risk of devastating health complications such as amputation and blindness."
Professor Mike Lean, lead researcher at Glasgow University, said: "The reason for doing this research is we do not know whether the extra effort of following a very restrictive diet for several months will indeed bring benefits in the long term.
"We know that weight regain after liquid diets has been common in the past, and could have harmful effects. This is why we need to study sufficient numbers of people for long enough to be sure that the benefits outweigh the costs."