Inclusion Criteria:

• Male and/or female patients from 30-80 years of age with a diagnosis of Type 2 diabetes (WHO criteria).
• Incipient and established diabetic nephropathy (urinary albumin excretion ≥ 100 mg/day but ≤ 2000 mg/day).
• Glomerular filtration rate (GFR) ≥ 40 ml/min (estimated using Modification of Diet in Renal Disease (MDRD) formula) in the last 4 months.
• Female patients must be postmenopausal or must have had a bilateral oophorectomy or must have been surgically sterilized or hysterectomized at least 6 months prior to screening.
• To be eligible patients must fulfill the following criteria: Patients on ongoing hypertensive therapy must have a blood pressure ≥ 135/85 mm Hg but lower than 170/105 mm Hg at baseline (Day -1) AND patients must be on stable antihypertensive medications for at least 8 weeks prior to baseline (Day -1).; Newly diagnosed hypertensive patients must have a blood pressure ≥ 135/85 mm Hg but lower than 170/105 mm Hg at baseline (Day -1).
• Patients must be on stable hypoglycemic medications for at least 8 weeks prior to Visit 2 ( Day -1).
• Patients must be willing and medically able to discontinue all Angiotensin-converting enzyme inhibitor (ACEI), Angiotensin receptor blocker (ARB), aldosterone receptor antagonist and potassium sparing diuretic medications for the duration of the study.
• Oral body temperature within the range 35.0-37.5 °C
• Able to provide written informed consent prior to study participation. .
• Able to communicate well with the investigator and comply with the requirements of the study.

Exclusion Criteria:

• Severe Hypertension Grade 3 WHO classification (Mean Sitting Diastolic Blood Pressure (MSDBP)  110 mmHg and/or Mean Sitting Systolic Blood Pressure MSSBP  180 mmHg)
• Acetylsalicyclic acid (ASA) treatment >1g/day or regular use of Non steroidal anti-inflammatory drug (NSAIDs)
• Kidney disease not caused by diabetes or hypertension
• Serum potassium < 3.5 or > 5.1 mEq/L
• GFR < 40 ml/min/1.73m2 as measured by the MDRD formula
• Serum albumin < 2.0mg/dL
• History of hypertensive encephalopathy or cerebrovascular accident at any time prior to Visit1.
• Current diagnosis of heart failure (New York Heart Association (NYHA) Class II-IV)
• History of myocardial infarction, unstable angina pectoris, coronary bypass surgery, or any percutaneous coronary intervention (PCI) during the 6 months prior to Visit 1
• Second or third degree heart block without a pacemaker
• Concurrent potentially life threatening arrhythmia or symptomatic arrhythmia
• Clinically significant valvular heart disease
• Type 1 diabetes mellitus
• Uncontrolled Type II diabetes mellitus (Hemaglobin subtype A1C (HbA1C) >11 %)
• History of malignancy including leukemia and lymphoma (but not basal cell skin carcinoma) within the past five years
• Participation in any clinical investigation within 4 weeks prior to dosing or longer if required by local regulation.
• Donation or loss of 400 mL or more of blood within 8 weeks prior to dosing.
• Significant illness within the two weeks prior to dosing.
• Any surgical or medical condition which might significantly alter the absorption, distribution, metabolism, or excretion of study drugs including, but not limited to, any of the following:

History of major gastrointestinal tract surgery such as gastrectomy, gastroenterostomy, or bowel resection

-Currently active or previously active inflammatory bowel disease during the 12 months prior to Visit 1 Currently active gastritis, duodenal or gastric ulcers, or gastrointestinal/rectal bleeding during the 3 months prior to Visit 1.

Any history of pancreatic injury, pancreatitis or evidence of impaired pancreatic function/injury as indicated by abnormal lipase or amylase Evidence of hepatic disease, a history of hepatic encephalopathy, a history of esophageal varices, or a history of portocaval shunt

• Current treatment with cholestyramine or cholestipol resins
• History of immunocompromise, including a positive HIV test result.
• History of a positive Hepatitis B surface antigen (HBsAg) or Hepatitis C test result.
• History of drug or alcohol abuse within the 12 months prior to dosing.
• Persons directly involved in the execution of this protocol.
• Any condition that in the opinion of the investigator or the Novartis medical monitor would jeopardize the evaluation of efficacy or safety
• History of noncompliance to medical regimens or unwillingness to comply with the study protocol
• Known or suspected contraindications to the study medications, including history of allergy to Angiotensin converting enzyme (ACE) inhibitors and/or to thiazide diuretics or other sulfonamide derived drug
• Any surgical or medical condition, which in the opinion of the investigator, may place the patient at higher risk from his/her participation in the study, or is likely to prevent the patient from complying with the requirements of the study or completing the study
• Use of any prescription drug or over-the-counter (OTC) medication which is prohibited by the protocol.
• Patients who previously participated in any Aliskiren study.
• Pregnant or nursing woman.

Other protocol-defined inclusion/exclusion criteria may apply