The present study evaluated the effect of dietary sodium butyrate (SB) supplementation on the growth and immune function in the proximal intestine (PI), middle intestine (MI) and distal intestine (DI) of young grass carp (Ctenopharyngodon idella). The fish were fed one powdery sodium butyrate (PSB) diet (1000.0 mg kg−1 diet) and five graded levels of microencapsulated sodium butyrate (MSB) diets: 0.0 (control), 500.0, 1000.0, 1500.0 and 2000.0 mg kg−1 diet for 60 days. Subsequently, a challenge test was conducted by injection of Aeromonas hydrophila. The results indicated that optimal SB supplementation improved the fish growth performance (percent weight gain, specific growth rate, feed intake and feed efficiency) and intestinal growth and function (intestine weight, intestine length, intestinal somatic index, folds height, trypsin, chymotrypsin, lipase and amylase activities), increased beneficial bacteria lactobacillus amount and butyrate concentration, decreased baneful bacteria Aeromonas and Escherichia coli amounts, reduced acetate and propionate concentrations, elevated lysozyme and acid phosphatase activities, increased complement (C3 and C4) and immunoglobulin M contents, and up-regulated β-defensin-1 (rather than DI), hepcidin, liver expressed antimicrobial peptide 2B (LEAP-2B) (except LEAP-2A), Mucin2, interleukin 10 (IL-10), IL-11 (rather than PI), transforming growth factor β1 (rather than PI), transforming growth factor β2 (rather than PI), IL-4/13A, IL-4/13B and inhibitor of κBα (IκBα) mRNA levels, whereas it down-regulated tumor necrosis factor α, interferon γ2, IL-1β (rather than PI), IL-6, IL-8, IL-15 (rather than PI), IL-17D (rather than PI), IL-12p35, IL-12p40 (rather than PI or MI), nuclear factor kappa B p65 (NF-κB p65) (except NF-κB p52), c-Rel (rather than PI or MI), IκB kinase β (IKKβ) (rather than PI), IKKγ (except IKKα), p38 mitogen-activated protein kinase (p38MAPK) and MAPK kinase 6 mRNA levels in three intestinal segments of young grass carp (P < 0.05), suggesting that SB supplementation improves growth and intestinal immune function of fish. Furthermore, according to the positive effect, MSB was superior to PSB on improving growth and enhancing intestinal immune function of fish, and based on feed efficiency of young grass carp, the efficacy of MSB was 3.5-fold higher than that of PSB. Finally, based on percent weight gain, protecting fish against enteritis morbidity and lysozyme activity, the optimal SB supplementation (MSB as SB source) of young grass carp were estimated to be 160.8, 339.9 and 316.2 mg kg−1 diet, respectively.