Nullah Aik and Nullah Palkhu, two tributaries of river Chenab, were investigated for the assessment of fish habitat degradation as indicator of stream health. Fish abundance data were collected from 18 sites from September 2004 to April 2006 to develop multimetric indices for fish assemblage integrity and to detect the intensity of habitat degradation. A total of 12 metrics were calculated on the basis of taxonomic richness, habitat preference, trophic guild, stress tolerance and origin of species to develop stepped and continuous index of biological integrity (IBI) criteria. Cluster analysis (CA) classified sites based on species composition into three groups, viz., reference, moderately impaired and impaired groups. Non-metric multidimensional scaling (NMDS) was applied to identify underlying ecological gradient to highlight the habitat degradation. NMDS segregated two sites as less impaired, five sites as moderately impaired and eleven sites as impaired groups. Axes 1 and 2 explained a total variation of 53.3%. First axis explained the level of habitat impairment, whereas axis 2 indicated species richness along longitudinal gradient of streams. Sites located upstream of Nullah Aik showed higher IBI scores which dropped to its lowest in downstream sites near Sialkot city. Lowest values of IBI of sites in close proximity of city indicated the role of anthropogenic activities in catchment areas. The results indicated that variability in water chemistry can be related as a function of stream sites impairments (i.e., unimpaired, moderately impaired, and severely impaired). Water quality parameters showed strong correlation with IBI scores. Significantly negative correlation of IBI scores with COD, TDS, turbidity, Fe, Cr, Zn and positive correlation with DO and pH was found. The results can be used for restoration and future management of small streams passing through urban areas of Pakistan.