Major environmental events that fragment populations among multiple island habitats have potential to drive large-scale episodes of speciation and adaptive radiation. A recent palaeolimnological study of sediment cores indicated that Lake Malawi underwent major climate-driven desiccation events 75 000–135 000 years ago that lowered the water level to at least 580 m below the present state and severely reduced surface area. After this period, lake levels rose and stabilized, creating multiple discontinuous littoral rocky habitats. Here, we present evidence supporting the hypothesis that establishment and expansion of isolated philopatric rock cichlid populations occurred after this rise and stabilization of lake level. We studied the Pseudotropheus (Maylandia) species complex, a group with both allopatric and sympatric populations that differ in male nuptial colour traits and tend to mate assortatively. Using coalescent analyses based on mitochondrial DNA, we found evidence that populations throughout the lake started to expand and accumulate genetic diversity after the lake level rise. Moreover, most haplotypes were geographically restricted, and the greatest genetic similarities were typically among sympatric or neighbouring populations. This is indicative of limited dispersal and establishment of assortative mating among populations following the lake level rise. Together, this evidence is compatible with a single large-scale environmental event being central to evolution of spatial patterns of genetic and species diversity in P. (Maylandia) and perhaps other Lake Malawi rock cichlids. Equivalent climate-driven pulses of habitat formation and fragmentation may similarly have contributed to observed rapid and punctuated cladogenesis in other adaptive radiations.