OBJECTIVE To study the clinical efficacy and the incremental cost-effectiveness of albendazole in improving the nutritional status of pre-school children. METHODS Single blind, placebo-controlled trial with child as the unit of randomization. METHODS In the Anganwadi centers of the Integrated Child Development Services situated in the urban slums of Lucknow, North India. METHODS Thirty-two Anganwadi centers were randomly selected for the trial. Included were registered resident children between 1.5 to 3.5 years of age with informed and written parental consent. The intervention group received 600 mg of albendazole powder every six months while the placebo group received same quantity of calcium powder. Enrolled children were contacted once in six months from January 1995 to 1997 and given treatment. The outcome measure were change in the proportion of underweight (weight for age <-2.00z), stunted (height for age <-2.00z) children and the cost per child prevented from becoming stunted. RESULTS There were 610 and 451 children in the albendazole and placebo groups, respectively. Mean age at recruitment was 31.8 months (SD: 9.7). Follow-up and compliance in both the groups was >95%. During the 2 year follow-up, the proportion of stunted children increased by 11.44% and 2.06% in the placebo and albendazole groups, respectively, and the difference was 9.38% (95% CI 6.01% to 12.75%; p value <0.0001). Direct fecal smear was positive for the ova of ascaris in 41.2% and 55.3% children in the albendazole and placebo groups, respectively at the end of the study (p value <0.001). The annual family expenditure on illness in the recruited child was Rs. 743 (SD: 662) and Rs. 625 (SD: 609) in the albendazole and the placebo groups, respectively. The incremental cost-effectiveness ratio was Rs 543.00 for each case of stunting prevented with albendazole. There was no difference in the various morbidity or cognitive performance, as judged by the revised Denver prescreening questionnaire, in both the groups at enrollment as well as at the end of the study. CONCLUSIONS Six monthly albendazole reduces the risk of stunting with a small increase in the expenditure on health care from the payer's perspective. Larger trials are needed to study the effect of albendazole on prevention of stunting, cognitive functions and all-cause childhood mortality.