Exposure to high blood sugars damages the delicate nerves causing neuropathy. Why this happens is not very clear but there is a combination of factors like complex interaction between nerve and blood vessels.
High blood sugar interferes with the ability of the nerve to transmit signals. It also weakens the walls of the capillaries that supply the nerves with oxygen and nutrients.
Inflammation in the nerves caused by an autoimmune response. In this the immune system by mistake attacks part of your own body taking it to be a foreign organism.
Genetic factors unrelated to diabetes making people more susceptible to nerve damage.
Smoking and alcohol abuse which damage both nerves and blood vessels.