Type 2 diabetes mellitus (T2DM) is fundamentally linked to gut microbiota dysbiosis, a condition that triggers a cascade of pathophysiological changes including aberrant host-microbe co-metabolism, compromised intestinal barrier integrity, and chronic low-grade inflammation, which collectively drive insulin resistance. While conventional therapies have limitations, traditional Chinese medicine (TCM) presents a promising therapeutic strategy. This review comprehensively elucidates the pathophysiological link between gut dysbiosis and T2DM. It then systematically summarizes the multi-target mechanisms by which TCM exerts its therapeutic effects, including: remodeling the gut microbial ecosystem; reprogramming host-microbe co-metabolism of short-chain fatty acids (SCFAs), bile acids (BAs), and branched-chain amino acids (BCAAs); reinforcing the intestinal barrier to mitigate metabolic endotoxemia; and modulating key signaling pathways involved in inflammation and immunity, etc. Key clinical evidence is also summarized. Furthermore, the review critically evaluates the preclinical and clinical evidence supporting these mechanisms, highlighting both therapeutic potential and current challenges, such as the need for standardization. Finally, current limitations and future prospects are considered, proposing a path forward for integrating microbiota-targeted TCM therapies into the modern, evidence-based management of T2DM.