Patients with diabetic peripheral neuropathy are significantly more likely to fall while walking than subjects with intact sensation. While it has been suggested that these patients walk slower to improve locomotor stability, slower speeds are also associated with increased locomotor variability, and increased variability has traditionally been equated with loss of stability. If the latter were true, this would suggest that slowing down, as a locomotor control strategy, should be completely antithetical to the goal of maintaining stability. The present study resolves these seemingly paradoxical findings by using methods from nonlinear time series analysis to directly quantify the sensitivity of the locomotor system to local perturbations that are manifested as natural kinematic variability. Fourteen patients with severe peripheral neuropathy and 12 gender-, age-, height-, and weight-matched non-diabetic controls participated. Sagittal plane angles of the right hip, knee, and ankle joints and tri-axial accelerations of the trunk were measured during 10 min of continuous overground walking at self-selected speeds. Maximum finite-time Lyapunov exponents were computed for each time series to quantify the local dynamic stability of these movements. Neuropathic patients exhibited slower walking speeds and better local dynamic stability of upper body movements in the horizontal plane than did control subjects. The differences in local dynamic stability were significantly predicted by differences in walking speed, but not by differences in sensory status. These results support the hypothesis that reductions in walking speed are a compensatory strategy used by neuropathic patients to maintain dynamic stability of the upper body during level walking.