Type 2 Waking up with dry mouth and terrible thirst in early hours.

I also suffer, if it can be considered as suffer, from the same or similar thing. I believe it's the result of sleeping and having the mouth open at the same time, so that the inner mouth, lips and the top part of the throat naturally dry as the air is drawn into the lungs, warmed in the lung and then expelled.
I'm sorry I can't offer any definitive answer to this problem, but I have found that it was most useful to keep one of the smaller water bottles that have the flip type securing sealing nozzles close by my bed, and keep the bottle filled with water to which a small quantity of pure lemon juice has been added. That way when of if I wake during the night I am then able to quench my parched mouth, lips and throat from the bottle of lemon flavoured water that is beside my bed and easily accessible.
Sorry I can't be of any further help, perhaps someone else may have the answer or a better solution.

I'm a Type 2 myself. Drinking water with a little Lemon Juice added won't effect B/G levels to any extent, so whatever your going to sleep B/G level is, and your waking B/G level, in this instant it won't make any significant difference to any B/G readings.
In this instant, it isn't the quantity of liquid that you drink from the bottle, you only need a very small mouthful The Lemon Juice in such low concentration will stimulate your body to moisten the inner mouth naturally.

There is a need to be careful drinking water with pure lemon juice in it during the night. It is a source of acid which can cause teeth problems. The acid stays in the mouth and is not washed away.

Please don't put anything acidic into your mouth. When your mouth is dry it means you don't have the natural buffering action of your saliva. This causes an acid environment in your mouth, favouring the presence of unhealthy bacteria which thrive in an acidic environment. Adding to the acidity will increase this bacterial problem and will do nothing to alleviate your dryness. Try using a saliva substitute before going to bed at night. There are several which are formulated with long-acting humectants such as Oralbalance Gel, BioXtra Gel or Oralieve Gel. These may even be available on prescription! Just smear a quantity onto your tongue and gums before going to sleep and it stops that awful feeling of dryness without disturbing your mouth's natural ecosystem. It is even more important in the case of Diabetes to try to maintain your mouth's natural environment because Diabetics have much more sugar in their saliva than non-Diabetics, which adds to the acidic-load. I hear there is a new product about to be launched which blocks the action of this excess salivary glucose. Definitely worth looking out for, given the difficulty in maintaining a healthy mouth in Diabetes. I hope this helps!

I had the same problem, but it sorted it self out after I had by blood sugars under control for a few months.

I have the same problem and have had for years, long before diabetes. I resolve it with a few sips of water. I mean sips, not gulps. It is back again next time I wake up, so another 2 or 3 sips of water and it is solved again. I probably do sleep with my mouth open as I know I snore.