Persistent diarrhoea in childhood causes severe malnutrition, and morbidity in 15%+ cases. Treatment includes nutritional rehabilitation for weight gain and diarrheal recovery. This study evaluates nutritional recovery (defined as weight gain (> 5 g/kg/day) with a resolution of diarrhea by day 7 of treatment), intestinal permeability and insulin-like growth factor I (IGF-I) response in malnourished children with faltering growth (aged 6-36 months) with persistent diarrhoea ((>/= 14 days) and their relation to concomitant systemic infection(s) (as indicated by serum C reactive protein (CRP)). For a minimum of 7 days, 63 children were fed a previously validated dietary regimen (data not available) of rice–lentil (khitchri) and yogurt aimed at providing at least 100 kcal/kg/day by day 3, with ad libitum feeds thereafter. Children were nursed on a research ward throughout. 49 children were treatment successes. They had a significant increase in serum IGF-I and IGF-I% correlated with weight gain. 14 children did not meet the criteria for nutritional recovery. They had higher serum CRP concentrations and sepsis at admission. They had lower mean (SD) weight gain in spite of overall mean energy intake being comparable with treatment successes. This may indicate malabsoption. Admission CRP concentration and IGF-I were negatively correlated. CRP concentrations at admission and corresponding individual IGF-I values over the 7 days treatment were significantly correlated. Significantly raised CRP concentrations in children with a correspondingly low IGF-I response may indicate a continued inflammatory or infected state in these children. Small but opposing trends of urinary excretion of the oral lactulose dose were seen in both groups over the seven days of treatment, indicating worsening enteropathy (mucosal injury) among treatment failures. None of the permeability parameters correlated with IGF-I at baseline or recovery. The study confirms that a traditional rice–lentil (khitchri) and yogurt diet can be used successfully for enteral nutritional rehabilitation in malnourished children with persistent diarrhoea and leads to adequate weight gain; Serum IGF-I levels correlates closely with weight gain and reduction in stool output; recovery is delayed with sepsis and raised blood CRP concentrations at admission; IGF-I is depressed at admission in children with persistent diarrhoea. The data provide evidence that serum IGF-I response in recovering malnourished children with persistent diarrhoea may provide a sensitive measure of nutritional and diarrhoeal recovery. Further studies are needed to evaluate factors regulating the IGF-I response in such children, especially the effect of intercurrent infections. Arbitrary definition of treatment failure is a study limitation.