Habitat diversity reflects the range of available habitats used by species with different niche requirements and, therefore, influences species diversity. Land use influences stream condition, and streams in poor condition are often wide, shallow, sediment‐laden channels with low instream habitat diversity. Our goal was to evaluate the effect of instream habitat diversity on fish species diversity, the effect of stream habitat condition on habitat diversity, and the effect of habitat diversity, stream condition, and other natural stream features on fish assemblage structure (proportional abundance) in an impaired upper Snake River basin watershed containing a locally diverse but regionally depauperate species pool. We sampled fishes and instream and riparian habitat at 41 sites, focusing on measures of instream habitat diversity and the following stream condition indicators: livestock trails on streambanks, streambank stability, channel width‐to‐depth ratio, percent fine substrates, and woody riparian vegetation. Multiple regression revealed that fish species diversity was positively associated with all four components of habitat diversity, that is, diversity in substrate, cover, water depth, and water velocity (P < 0.09, adjusted R2 = 0.642). All four components of habitat diversity increased with stream size, and each component was negatively but weakly associated with at least one stream condition indicator (P < 0.10, adjusted R2 = 0.23 to 0.61). Fish assemblage structure was influenced primarily by natural stream features (gradient, temperature) and secondarily by stream condition indicators and streamflow diversity. Our results connect fish species diversity increases in larger streams with concomitant increases in four dimensions of instream habitat diversity. The findings show how stream condition reflecting land uses, such as riparian over‐grazing, can negatively impact habitat diversity within that stream‐size continuum, thus emphasizing the role land management plays in maintaining fish species diversity. Received November 6, 2015; accepted February 20, 2016 Published online June 22, 2016