Using data on 24,975 respondents to the Welsh Health Survey 1998 aged 17-74 years, we investigated associations between individual mental health status measured using the SF-36 instrument, social class, economic inactivity and the electoral division Townsend deprivation score. In a multilevel modelling analysis, we found mental health was significantly associated with the Townsend score after adjusting for composition, and this effect was strongest in respondents who were economically inactive. Further contextual effects were shown by significant random variability in the slopes of the relation between mental health and economic inactivity at the electoral division level. Our results suggest that the places in which people live affect their mental health, supporting NHS policy that multi-agency planning to reduce inequalities in mental health status should address the wider determinants of health, as well as services for individual patients.