Will type 2 diabetes diminish muscle and strength gains from weight lifting? And should insulin use be modified when lifting heavy weights?  

Not if controlled. If diabetes is well controlled, it should not diminish the effect of exercise in increasing strength and muscle mass. In order to evaluate whether Insulin needs to be adjusted, you should measure glucose before and after exercise sessions; if the sugar is falling with exercise, you could have a snack before exercising, drink a sports drink during exercise, or decrease Insulin at the meal before.