From a NYT article published 7/17/2006: ". . . .several large studies have found that compared with healthy people of the same age and sex, those with Type 2 diabetes are twice as likely to develop Alzheimer’s. The reason is not known, but researchers initially suspected that cardiovascular problems caused by diabetes might contribute to dementia by blocking blood flow to the brain or causing strokes.
More recently, though, scientists have begun to think that the diseases are connected in other ways as well. In both, destructive deposits of amyloid, a type of protein, build up: in the brain in Alzheimer’s, in the pancreas in Type 2 diabetes.
People with Type 2 often have a condition called insulin resistance, in which their cells cannot properly use insulin, the hormone needed to help glucose leave the blood and enter cells that need it. To compensate, the pancreas makes extra insulin, which can reach high levels in the blood. Too much insulin may lead to inflammation, which can contribute to damage in the brain.
In addition, abnormalities in glucose metabolism and insulin levels in the brain itself may be harmful. Some research has found that too much insulin in the brain can contribute to amyloid buildup. Researchers have even suggested that Alzheimer’s disease may actually be ‘Type 3 diabetes,’ a form of the disease affecting the nervous system."
The NYTimes is not what I’d characterize as a reliable source for medical information, but this article is a decent summary of current biochemical thinking as I understand it. A good bit of peer-reviewed research can be found with a Google search.