Background: Poor hand dexterity may increase the risk of functional disability; however, few studies have examined the relationship between hand dexterity and incident functional disability. The aim of this study was to prospectively investigate the dose-response association of hand dexterity with incident functional disability in community-dwelling older adults. Methods: This study included 1,069 older adults aged ≥65 years in Kasama City, Japan. Peg-moving and circle-drawing tasks were used to evaluate hand dexterity. Functional disability was identified using the Japanese Long-Term Care Insurance System database. Restricted cubic spline analysis was performed to investigate the dose-response association between hand dexterity and incident functional disability. Results: During a mean follow-up of 8.5 years (maximum 14.0 years), 248 participants (23.2%) developed functional disability. The lowest performance group in each hand dexterity test had a significantly higher risk of functional disability than the highest performance group—peg-moving (hazard ratio [HR]=1.92, 95% confidence interval [CI] 1.29–2.87) and circle drawing (HR=1.66, 95% CI 1.15–2.41). Spline analysis confirmed curvilinear dose-response associations between hand dexterity and incident functional disability. Increased risk was observed when participants performed worse than the cut points (peg-moving, 37.9/38.0 seconds; circle drawing, 21/20 points), and no decreased risk was observed for those who performed better than these cut points. Conclusion Easily evaluated hand dexterity tests may be valuable for predicting functional disability in older adults. Curvilinear dose-response associations suggest that maintaining adequate hand dexterity could be a key strategy to support functional independence.