Reliance on biomass fuels for cooking and heating exposes many women and young children in developing countries to high levels of air pollution indoors. Exposure to biomass smoke has been linked to reduced birth weight, acute respiratory infections, and childhood mortality. This study examines the association between household use of biofuels (wood, dung, and crop residues) for cooking and heating and prevalence of anaemia and stunting in children. Methods Data are from a 1998–99 national family health survey in India, which measured height, weight, and blood haemoglobin of 29 768 children aged 0–35 months in 92 486 households. Multinomial logistic regression is used to estimate the effects of biofuel use on prevalence of anaemia and stunting, controlling for exposure to tobacco smoke, recent episodes of illness, maternal education and nutrition, and other potentially confounding factors. Results Analysis shows that prevalence of moderate-to-severe anaemia was significantly higher among children in households using biofuels than among children in households using cleaner fuels (RRR 5 1.58; 95% CI: 1.28, 1.94), independent of other factors. Prevalence of severe stunting was also significantly higher among children in biofuel-using households (RRR 5 1.84; 95% CI: 1.44, 2.36). Thirty-one per cent of moderate-to-severe anaemia and 37% of severe stunting among children aged 6–35 months in India may be attributable to exposure to biofuel smoke. Effects on mild anaemia and moderate stunting were smaller, but positive and statistically significant. Effects of exposure to tobacco smoke on anaemia and stunting were small and not significant. Conclusions The study provides a first evidence of the strong association between biofuel use and risks of anaemia and stunting in children, suggesting that exposure to biofuel smoke may contribute to chronic nutritional deficiencies in young children