Birthweight continues to be the leading infant health indicator and the main focus of infant health policy. Low birthweight babies are at a higher risk of mortality and morbidity in most low-income countries. However, the physical activity level of pregnant women and its association with low birthweight is not well studied in Ethiopia. To address the above gap, we aimed to examine the maternal physical activity level and other characteristics during the third trimester and its association with birthweight at term in South Ethiopia. A community-based prospective cohort study was conducted among 247 randomly selected women in their third trimester of pregnancy. We measured the physical activity level using the Global Physical Activity Questionnaire, which included the type and level of various categories of activities. Anthropometric measurements of mothers were taken following standard procedures, and birthweight was recorded within 72 hours of delivery. To identify the effect of physical activity level and other maternal characteristics on low birthweight, we performed a multivariable logistic regression analysis. Overall, 111 (47.2%) mothers were engaged in vigorous physical activities during third trimester. The incidence of low birthweight was 21.6% and 9.68% among newborns of mothers who engaged in vigorous and moderate or low physical activity, respectively. The incidence of low birthweight at term was significantly associated with vigorous physical activity [adjusted odds ratio (AOR) = 2.48; 95% confidence interval (CI): 1.01–6.09], prolonged standing [AOR = 3.37; 95% CI: 1.14–9.93], and squatting [AOR = 2.61; 95% CI: 1.04–6.54)] during the third trimester of pregnancy. The vast majority of pregnant women were engaged in vigorous physical activities in their third trimester. Engagement in vigorous physical activity, standing for longer hours, and squatting were the major contributors to low birthweight at term. Hence, focused counseling should be conducted to reduce vigorous physical activity, standing, and squatting during the third trimester among pregnant women.