Four species of Paragalaxias (Galaxiidae) inhabit lakes of submontane Tasmania. P. dissimilis and P. eleotroides are sympatric in Great Lake and Shannon Lagoon; P. mesotes occurs in Arthurs and Woods lakes; P. julianus is found in lakes of the Western Plateau. Phylogenetic analysis shows the genus to be monophyletic, and indicates that P. julianus is the sister-species of the other three species, and that P. dissimilis is the sister-species of P. mesotes and P. eleotroides. Morphological comparisons show that the two sympatric species have diverged from the others, with P. dissimilis becoming limnetic/pelagic (terminal mouth, eyes more lateral with convex interorbital, symmetrical paddle-shaped pectoral fins with rays divided once, forked tail, many, long gill rakers, large swimbladder), while P. eleotroides has become benthic (downturned mouth, eyes high on head with interorbital convex, rhomboidal pectoral fins with upper rays longest, rays divided twice, truncated tail, few, short gill rakers, small swim bladder). This character divergence is consistent with the tenets of character displacement except that it remains unproved that it has been driven by resource competition. The ecomorphological divergence parallels that described for species pairs in northern cool temperate lakes with fish faunas of low species richness, particularly in threespine stickleback, Gasterosteus aculeatus.