Malnutrition and diarrhoeal diseases are important interrelated health problems of preschool children in the developing countries. For a prospective study to determine the effect of malnutrition on diarrhoeal morbidity 721 children under 5 years, living in two villages near Hyderabad were registered. The children were classified into different nutritional grades based on initial body weights and heights; and diarrhoea morbidity was recorded during the subsequent one year. The aetiology of diarrhoea was determined in a subsample. The incidence of diarrhoea was observed to be about 1.6 episodes/child/year and was similar in children with different nutritional grades. The percentage of episodes leading to severe dehydration was, however, significantly higher (P less than 0.05) in children with grade III malnutrition. The isolation of ETEC was also higher in this group indicating a greater bacterial load in the gut. Although pre-existing malnutrition did not affect the incidence of diarrhoea it seems to have a significant impact on the severity of the disease.