The extract appeared to cut blood sugar levels.
Also, it blocked activity of an enzyme associated with the development of diabetic complications.
According to study's researchers, the finding raises hope of a new anti-diabetes drug.
The study has been published in the Journal of Agricultural and Food Chemistry.
Chamomile, also known as manzanilla, has been used for years as a medicinal cure-all to treat a variety of medical problems including stress, colds and menstrual cramps.
To reach the conclusion, researchers from University of Toyama, led by Atsushi Kato, fed chamomile extract to a group of diabetic rats for 21 days and compared the results with a group of control animals on a normal diet.
Blood glucose levels - high levels of which are a sign of diabetes - were significantly lower in the animals fed the extract, which appeared to inhibit production of the sugar in the liver.
Tests also showed reduced activity of an enzyme called aldose reductase in tissue samples from the extract group.
This enzyme helps change glucose into a sugar alcohol called sorbitol.
"More research would be needed before we can come to any firm conclusions about the role chamomile tea plays in fighting diabetes-related complications," BBC quoted Dr Victoria King, of the charity Diabetes UK, as saying.
"Diabetes UK wouldn't recommend people with diabetes increase their chamomile tea intake just yet.
"Eating a healthy balanced diet, taking regular physical activity and adhering to any prescribed medicines remain key ways to effectively control blood glucose levels, blood pressure and blood fats.
"Good diabetes management will help reduce the risk of serious complications such as heart disease, stroke and blindness," King added.