Marine organisms are under threat globally from a suite of anthropogenic sources, but the current emphasis on global climate change has deflected the focus from local impacts. While the effect of increased sedimentation on the settlement of coral species is well studied, little is known about the impact on larval fish. Here, the effect of a laterite "red soil" sediment pollutant on settlement behaviour and post-settlement performance of reef fish was tested. In aquarium tests that isolated sensory cues, we found significant olfaction-based avoidance behaviour and disruption of visual cue use in settlement-stage larval fish at 50 mg L(-1), a concentration regularly exceeded in situ during rain events. In situ light trap catches showed lower abundance and species richness in the presence of red soil, but were not significantly different due to high variance in the data. Prolonged exposure to red soil produced altered olfactory cue responses, whereby fish in red soil made a likely maladaptive choice for dead coral compared to controls where fish chose live coral. Other significant effects of prolonged exposure included decreased feeding rates and body condition. These effects on fish larvae reared over 5 days occurred in the presence of a minor drop in pH and may be due to the chemical influence of the sediment. Our results show that sediment pollution of coral reefs may have more complex effects on the ability of larval fish to successfully locate suitable habitat than previously thought, as well as impacting on their post-settlement performance and, ultimately, recruitment success.