To show that the severity of diarrheal disease in Aboriginal children in tropical Australia is a consequence of underlying small intestinal mucosal damage. A prospective study of 338 Aboriginal admissions compared to 37 non-Aboriginal children, both diarrhea cases and controls. Intestinal permeability was measured by lactulose-rhamnose (L/R) ratios on a timed 90-minute blood test. For diarrheal admissions, significantly more Aboriginal (vs. non-Aboriginal children) had hypokalemia (70 vs. 10%), acidosis (65 vs. 29%), moderate to severe dehydration (52 vs. 19%) and a longer mean length of stay (mean 8.9 vs. 3.9 days). Mean L/R ratios (95% confidence intervals) in Aboriginal children (diarrhea vs. controls) were 16.5 (14.6-18.7) vs. 4.5 (3.8-5.3) compared to 7.7 (4.4-13.3) vs. 2.5 (1.8-3.4), respectively, in non-Aboriginals. Abnormal permeability ratios (> 5.6) consistent with tropical-environmental enteropathy syndrome were found in 36% (27/75) of Aboriginal controls compared to none of the non-Aboriginal controls. On multiple regression, the factors associated with high L/R ratios were diarrheal severity ( < 0.001), acidosis ( = 0.007) and hypokalemia ( = 0.04). An underlying tropical-environmental enteropathy contributes to the severity of acute gastroenteritis in Aboriginal children. Diarrheal complications, such as acidosis, hypokalemia, and osmotic diarrhea are associated with high L/R ratios, reflecting greater small intestinal mucosal damage.