Damage to the lateral femoral cutaneous nerve is a conditin all its own, referred to as meralgia parasthetica, and we even have a subforum here for it (though it's not terrbily active):

http://neurotalk.psychcentral.com/forum76.html

This condition is more closely associated with obesity and tight-fitting garments that constrict the pelvis and upper thigh, but it's certainly possible that a weight loss could have triggered it, especially if you were heavy there to begin with. And, being diabetic, you are more prone to compressive nerve situations anyway.

Most of the treatment in these cases is symptomatic, though in extreme cases some have tried transpositional surgery and/or nerve ablation, since the lateral femoral cutaneous is a sensory nerve only.