SummaryLand-use changes have negative effects on stream conditions and fish assemblages, but their effects on water quality and the use of microhabitats by fish in subtropical lowland streams are unclear. We evaluated the effects of urban patches (two urban streams) in an agricultural matrix (two ‘agricultural’ streams) on water quality, microhabitat diversity and fish assemblages, as well as the selection of microhabitat types by fish in the Arroyo Colorado basin (Uruguay). Physicochemical water parameters were measured, the fish sampled using electrofishing, microhabitat diversity, occupancy of microhabitats by fish and the most important microhabitat types for fish species were analysed. Agricultural streams presented higher water quality and microhabitat diversity, and most of the microhabitats were occupied by fish. Microhabitats with medium substrate sizes and running water prevailed in urban streams, while the presence of macrophytes, shallow waters and different substrate sizes were common in agricultural streams. The most important microhabitats used by fish species were not the most abundant, highlighting the fragility of streams resulting from the loss of appropriate conditions. Understanding how different degrees of deterioration in streams affect water quality and microhabitat–fish interactions is essential for the designing of effective monitoring and restoration programmes.