Preferential flow is a runoff mechanism intermediate between matrix flow and surface flow, transmitting water at high velocity through the subsurface zone. To assess the effect of preferential flow on soil-water flow and surface runoff in a forested watershed, precipitation and volumes of preferential flow, matrix flow and surface runoff were measured over a period of four years in a forested watershed in the Three Gorges area of southern China. Results show that preferential-flow hydrographs have gentler rises and steeper recessions than those for matrix flow and surface runoff. Preferential flow as a percentage of soil-water flow ranged from 2.40% to 8.72% and the maximum preferential-flow velocity exceeded as much as 5600 times that of matrix flow. This shows that preferential flow plays an important role in the movement of soil water. Preferential flow has a significant effect on peak surface runoff by increasing the surface runoff rate and accelerating the appearance of peak surface runoff. Preferential flow can also prolong the duration of surface runoff. Surface runoff was observed to be positively correlated with preferential flow. The greater the sum of rainfall amount and antecedent precipitation is, the greater the effect of preferential flow on surface runoff is.