Alien invasive aquatic macrophytes tend to displace native species and transform diverse macrophyte communities into monospecific stands. It is often thought that superior competitiveness allows alien invaders to achieve this. Cabomba caroliniana is a submersed macrophyte that is highly invasive worldwide and frequently monopolises habitats. However, field observations in Queensland, Australia, found that the native floating attached Nymphoides indica can co‐exist with C. caroliniana, highlighting N. indica as a potential candidate for habitat restoration. To identify factors and processes that regulate the coexistence of these species, we conducted a field survey and two experiments in artificial mesocosms. We found that N. indica leaf areal coverage of the water surface significantly reduced C. caroliniana standing crop biomass in the field. C. caroliniana growth was also linked to water depth; N. indica was not able to grow beyond 2 m depth. There was a small reduction in N. indica root and shoot biomass when co‐cultured with C. caroliniana in our experiment. Therefore, there was reciprocal competitive inhibition between the two species. However, the effect of N. indica on C. caroliniana was much larger. There was evidence that a reduction of C. caroliniana biomass below a threshold of c. 300 g dry mass/m is critical for protecting native submersed macrophyte diversity and abundance. Once C. caroliniana biomass exceeds this threshold, it dominates plant communities and forms high biomass monocultures. The experimental work identified shading as the most important factor that reduces C. caroliniana biomass, corroborating the relationship between leaf areal cover and C. caroliniana biomass found in the field. Based on these findings, N. indica could be useful for restoring the shallow lake littoral habitat, because it suppresses biomass of the invasive species to a level that allows other macrophytes to coexist and additionally increases habitat heterogeneity. Similarly, N. indica could be suitable to restore areas where C. caroliniana was previously removed to reduce the likelihood of future habitat monopolisation by C. caroliniana and realise long‐term ecological benefits from invasive macrophyte management.