A strong association between functional disability and depressive symptoms in older people has frequently been reported. Some studies attribute this association to the disabling effects of depression, others to the depressogenic effects of physical health-related disability. The authors examined the reciprocal effects between depressive symptoms and functional disability and their temporal character in a community-based cohort of 753 older people with physical limitations who were assessed at yearly intervals. They compared structural equation models that differed in terms of direction and speed of effects between patient-reported disability in instrumental and basic activities of daily living (IADL/ADLs) and depressive symptoms. The association between disability and depression could be separated into three components: (a) a strong contemporaneous effect of change in disability on depressive symptoms, (b) a weaker 1-year lagged effect of change in depressive symptoms on disability (probably indirect through physical health), and (c) a weak correlation between the trait (or stable) components of depression and disability. IADL/ADL disability and depressive symptoms are thus mutually reinforcing over time. Compensatory forces like effective treatment and age-related adaptation may protect elders against this potential downward trend. To improve quality of life in elderly adults, treatment should target disability when it is new and depression when it is persistent.