Objectives: To analyze the prescribing pattern and appropriateness of drug treatment of diarrhoea in hospitalized children. The economic burden of the disease and adverse drug reactions (ADRs) occurring during the course of treatment was also studied. Materials and Methods: It was a prospective, observational, single center study undertaken in pediatric inpatients of diarrhea, aged one month to twelve years over a period of eighteen months at a tertiary care teaching hospital in western India. Modifi ed Kunin’s criteria along with the guidelines set by the Indian Academy of Pediatrics (IAP) and WHO were followed for assessing the appropriateness of the antimicrobials prescribed. The adverse drug reactions occurring during course of the treatment were noted and the economic burden of the disease was calculated as direct and indirect costs. Results: A total of 103 patients were enrolled, of whom 45% were in the age group of one month to one year. Diarrhoea with some dehydration was diagnosed in 50.5% patients followed by severe dehydration (34.9%) and no dehydration (14.6%). The number of drugs and antimicrobials prescribed per patient were 7.53±1.87 and 1.92±0.67, respectively. Rehydration fl uids (31.6%) and antimicrobials (25.5%) were the commonest drug groups prescribed. Among the antimicrobials, cefotaxime, cotrimoxazole and amoxicillin with clavulanic acid were frequently prescribed. Appropriate antibacterial therapy was given in only 13% of the cases. Only one ADR due to cotrimoxazole was observed. The economic burden of the disease was calculated to be Rs. 3164.81 per patient. Conclusion: Inappropriate use of antimicrobials was seen in the study. Emphasis on proper diagnosis and treatment, education and availability of locally effective guidelines may help in a better and judicious use of drugs in children.