Context To achieve maximum growth and decrease fattening periods farmers tend to use a high concentrate diet in the total mixed ration (TMR). A larger particle size of straw may increase the concentrate level in the TMR and improve the performance without affecting the rumen health of lambs. Aims This study aimed to evaluate the effects of physical form (PF) and wheat straw levels (SL) in the diet on growth performance, rumen health, and carcass characteristics of lambs. Methods Thirty-two male Lohi lambs (31.5 ± 2.5 kg, age 6–7 months) were randomly assigned to four treatments in a 2 × 2 factorial arrangement with two physical forms [pelleted, conventional mashed] and two levels of straw (15% and 25%). The experiment lasted for 16 weeks including 2 weeks for dietary adaptation, 13 weeks for growth data collection, and 1 week for digestibility. Key results Lambs fed pelleted and 15% straw diets had greater dry matter intake than those offered mashed and 25% straw diets. Lambs fed 15% pelleted straw TMR displayed a greater final bodyweight, average daily gain, and feed efficiency than the other treatments. Dry matter and organic matter digestibility were higher in lambs fed on the pelleted and 15% straw diets compared to those fed on the mashed and the 25% straw diets. However, neutral detergent fibre digestibility was higher in the lambs fed 15% straw than those fed 25% straw diets. Lambs fed pelleted and 15% straw diets had longer papillae (P < 0.05), covering greater surface area than those fed on the mashed and 25% straw diets. Lambs fed on the pelleted and 15% straw diets had greater (P < 0.05) marbling score, rib eye area, empty live weight, hot carcass weight, and fat content than the lambs fed mashed and 25% straw diets. Conclusion Greater digestibility and feed intake of lambs fed a 15% pelleted straw TMR led to better growth performance, and improved carcass quality. Implications Feeding wheat straw-based pelleted TMR with 15% straw ground at 8 mm shows great potential to enhance the sustainable lamb production system in Pakistan.