BACKGROUND: While healthcare costs for rotavirus gastroenteritis requiring hospitalization may be burdensome on households in Malaysia, exploration on the distribution and catastrophic impact of these expenses on households are lacking. OBJECTIVES: We assessed the economic burden, levels and distribution of catastrophic healthcare expenditure, the poverty impact on households and inequities related to healthcare payments for acute gastroenteritis requiring hospitalization in Malaysia. METHODS: A two-year prospective, hospital-based study was conducted from 2008 to 2010 in an urban (Kuala Lumpur) and rural (Kuala Terengganu) setting in Malaysia. All children under the age of 5 years admitted for acute gastroenteritis were included. Patients were screened for rotavirus and information on healthcare expenditure was obtained. RESULTS: Of the 658 stool samples collected at both centers, 248 (38%) were positive for rotavirus. Direct and indirect costs incurred were significantly higher in Kuala Lumpur compared with Kuala Terengganu (US$222 Vs. US$45; p<0.001). The mean direct and indirect costs for rotavirus gastroenteritis consisted 20% of monthly household income in Kuala Lumpur, as compared with only 5% in Kuala Terengganu. Direct medical costs paid out-of-pocket caused 141 (33%) households in Kuala Lumpur to experience catastrophic expenditure and 11 (3%) households to incur poverty. However in Kuala Terengganu, only one household (0.5%) experienced catastrophic healthcare expenditure and none were impoverished. The lowest income quintile in Kuala Lumpur was more likely to experience catastrophic payments compared to the highest quintile (87% vs 8%). The concentration index for out-of-pocket healthcare payments was closer to zero at Kuala Lumpur (0.03) than at Kuala Terengganu (0.24). CONCLUSIONS: While urban households were wealthier, healthcare expenditure due to gastroenteritis had more catastrophic and poverty impact on the urban poor. Universal rotavirus vaccination would reduce both disease burden and health inequities in Malaysia.