Fishing activity in Lake Victoria has been the main source of livelihood for households living around the lakeshores for several decades. The recent changes in fresh water fish landing have brought challenges to the fishing households. This study examines declining fish stocks and livelihood diversification among fishing households of Mfangano Island. Specifically, the study sought to address three research objectives: first was to assess the existing patterns of livelihood diversification of fishing households in the study area; second was to examine the determinants of livelihood diversification patterns of fishing households in Mfangano Island and finally to establish policy interventions on livelihood diversification activities o f the fishing households in the study area. The study used three methods of data collection. These included a household survey in which a sample size o f 80 fishing households were interviewed; key informant interviews were conducted among 7 informants and one focus group discussion was held with officials of fishing groups. The study findings indicate that fishing households were engaged in various activities. Among the key ones were fishing, selling smoked fish, working in food kiosk/hotel while others were employed either in government or Non- Government Organizations (NGOs). Further, the study revealed that fishing households supplemented their livelihoods with secondary activities such as firewood selling, charcoal burning, subsistence farming, boda boda and boat transport. Key household characteristics such as education, age, land ownership and time spent in activity were found to be closely linked to livelihood diversification. The study found out that decline in fish stocks had caused fishing households to diversify their livelihoods into various activities. Furthermore, it was revealed that other factors such as theft of fishing nets, illness and death of household members had also prompted livelihood diversification. In conclusion, fishing households were severely affected by the decline in fish stocks hence the observed livelihood diversification. In line with the study findings, it is recommended that fishing households consider the necessity to explore other livelihood options. The government and other organizations should support fishing households’ livelihoods by availing affordable credit facilities to social group.