Malnutrition is associated with childhood diseases such as diarrhea or other severe illness. Children who suffer from repeated episodes of diarrhea are more likely to suffer from malnutrition. In addition, the source of drinking water is a very important factor affecting the nutritional status. The objective of this study was to find out the prevalence of malnutrition condition among children aged 3 to 5 years old and the factors associated with it. A cross sectional study using simple random sampling was conducted among 220 children aged 3 to 5 years old from four kindergartens in Baghdad city, Iraq. Nutritional assessment was carried out using the indicator weight-for-age z-score based on World Health Organization cut off points. Acute malnutrition was found in 18.2 % of the respondents. In this study 65 % of the respondents used tap water to drink as compared to 35 % who used sterilized bottles as source of drinking water. The environmental factors mainly the source of drinking water was significantly associated with child nutritional status (p=0.034). The prevalence of diarrhea and admissions to the hospital due to diarrhea were also significantly associated with malnutrition (p < 0.01, p <0.01) respectively. In conclusion, the effect of diarrhea on child nutritional status is very important and till now considered the major cause of child malnutrition. Shortage of safe drinking water in Iraq can lead to an increase in diarrhea cases and eventually leading to child malnutrition.