It is estimated that at least 200 million children--mostly from developing countries--suffer from developmental delays. The study aims to contribute to an understanding of the contextual environment in which a child grows and develops in such setup; and in particular to evaluate the relative contributions of socio-economic status and rural-urban neighbourhoods on growth and psychomotor development. A cross-sectional study was conducted from May to November 2002 in 15 rural and 11 urban communities of Sindh, Pakistan. 1,244 children aged less than 3 years were assessed via home visits using Bayley's Infant Developmental Scale for psychomotor development, anthropometry and a socio-economic and demographic questionnaire. A socio-economic index was created using principal component analysis, and the study hypotheses explored through hierarchical linear modelling. We found that sub-optimal growth and development were prevalent among the study's children. Overall the mean psychomotor development (PD) index was 96.0 (SD 16.7), with 23% assessed as having delayed development, and undernourished with 39.8% stunted, 30.9% underweight and 18.1% wasted. Lower socio-economic status and living in a rural rather than urban neighbourhood were all found to have strong associations with lower psychomotor scores and with undernutrition. Rural-urban differences in undernutrition were explained by the lower socio-economic status of families in rural areas. By contrast, rural-urban differences in psychomotor scores remained strong even after controlling for differences in socio-economic status. It was estimated that rural residence accounted for 28% of cases of delayed psychomotor development among study children. Improvements in socio-economic status are vital to achieve optimal growth and development during early childhood. The study draws attention to the importance of taking heed of contextual needs, especially relating to differences between rural and urban neighbourhoods, in the formulation and implementation of early child care and development interventions.