Flooded rice paddies are one of the major biogenic sources of atmospheric methane. Apart from this contribution to the ‘greenhouse’ effect, rice paddy soil represents a suitable model system to study fundamental aspects of microbial ecology, such as diversity, structure, and dynamics of microbial communities as well as structure–function relationships between microbial groups. Flooded rice paddy soil can be considered as a system with three compartments (oxic surface soil, anoxic bulk soil, and rhizosphere) characterized by different physio-chemical conditions. After flooding, oxygen is rapidly depleted in the bulk soil. Anaerobic microorganisms, such as fermentative bacteria and methanogenic archaea, predominate within the microbial community, and thus methane is the final product of anaerobic degradation of organic matter. In the surface soil and the rhizosphere well-defined microscale chemical gradients can be measured. The oxygen profile seems to govern gradients of other electron acceptors (e.g., nitrate, iron(III), and sulfate) and reduced compounds (e.g., ammonium, iron(II), and sulfide). These gradients provide information about the activity and spatial distribution of functional groups of microorganisms. This review presents the current knowledge about the highly complex microbiology of flooded rice paddies. In Section 2 we describe the predominant microbial groups and their function with particular regard to bacterial populations utilizing polysaccharides and simple sugars, and to the methanogenic archaea. Section 3 describes the spatial and temporal development of microscale chemical gradients measured in experimentally defined model systems, including gradients of oxygen and dissolved and solid-phase iron(III) and iron(II). In Section 4, the results of measurements of microscale gradients of oxygen, pH, nitrate–nitrite, and methane in natural rice fields and natural rice soil cores taken to the laboratory will be presented. Finally, perspectives of future research are discussed (Section 5).