Objectives. This study examined the effect of depression on the incidence of physical disability and the role of confounding and explanatory variables in this relationship. Methods. A cohort of 6247 subjects 65 years and older who were initially free of disability was followed up for 6 years. Baseline depression was assessed by the Center for Epidemiological Studies Depression Scale. Disability in mobility and disability in activities of daily living were measured annually. Results. Compared with the 5751 nondepressed subjects, the 496 depressed subjects had a relative risk (95% confidence interval) of 1.67 (1.44, 1.95) and 1.73 (1.54, 1.94) for incidence disability in activities of daily living and mobility, respectively. Adjustment for sociodemographic characteristics and baseline chronic conditions reduced the risks to 1.39 (1.18, 1.63) and 1.45 (1.29, 1.93), respectively. Less physical activity and fewer social contacts among depressed persons further explained part of their increased disability risk. Conclusions. Depression in older persons may increase the risk for incident disability. This excess risk is partly explained by depressed persons' decreased physical activity and social interaction. The role of other factors (e.g., biological mechanisms) should be examined.