Domiciliary treatment of severely malnourished children could have economic and practical advantages over other methods. We compared three approaches in a controlled trial. 437 children in Dhaka (< 60% weight-for-height, and/or oedema) aged 12-60 months were sequentially allocated to treatment as inpatients, to day-care, or to care at home after one week of day-care. Institutional and parental costs incurred to reach 80% weight-for-height were compared. Costs for inpatient, day-care, and at-home groups averaged 6363, 2517, and 1552 taka (60 taka = UK pound 1). Mortality was low (< 5%) in all three groups. Day-care treatment approached inpatient care for speed of recovery at less than half the cost, but it was unpopular with parents. The at-home group took significantly longer to attain 80% weight-for-height than the other groups, but did so at the lowest average cost. Parental costs were highest for the at-home group as no food supplements were provided; nevertheless this was the most popular option. We conclude that at-home management of severely malnourished children after 1 week of inpatient care is a cost-effective strategy.