BACKGROUND Reducing use of hospital wards and improving their quality are central aims of mental health service policy. However, no comprehensive synthesis is available of evidence on residential alternatives to standard acute psychiatric wards. OBJECTIVE To assess the effectiveness and cost-effectiveness of and satisfaction with residential alternatives to standard acute in-patient mental health services. METHODS A systematic search identified controlled studies comparing residential alternatives with standard in-patient services. Studies were described and assessed for methodological quality. Results from higher quality studies are presented and discussed. RESULTS Twenty-seven relevant studies were identified. Nine studies of moderate quality provide no contraindication to identified alternative service models and limited preliminary evidence that community-based alternatives may be cheaper and individuals more satisfied than in standard acute wards. CONCLUSIONS More research is needed to establish the effectiveness of service models and target populations for residential alternatives to standard acute wards. Community-based residential crisis services may provide a feasible and acceptable alternative to hospital admission for some people with acute mental illness.