OBJECTIVE: To assess whether pulse oximetry improves health workers' performance in diagnosing severe childhood pneumonia at health centres in Southern Ethiopia. DESIGN: Parallel cluster-randomised trial. SETTING: Government primary health centres. PARTICIPANTS: Twenty-four health centres that treat at least one pneumonia case per day in Southern Ethiopia. Children aged between 2 months and 59 months who present at health facilities with cough or difficulty breathing were recruited in the study from September 2018 to April 2019. INTERVENTION ARM: Use of the Integrated Management of Childhood Illness (IMCI) algorithm and pulse oximeter. CONTROL ARM: Use of the IMCI algorithm only. PRIMARY AND SECONDARY OUTCOME MEASURES: The primary outcome was the proportion of children diagnosed with severe pneumonia. Secondary outcomes included referred cases of severe pneumonia and treatment failure on day 14 after enrolment. RESULT: Twenty-four health centres were randomised into intervention (928 children) and control arms (876 children). The proportion of children with severe pneumonia was 15.9% (148 of 928 children) in the intervention arm and 3.9% (34 of 876 children) in the control arm. After adjusting for differences in baseline variables children in the intervention arm were more likely to be diagnosed as severe pneumonia cases as compared with those in the control arm (adjusted OR: 5.4, 95% CI 2.0 to 14.3, p=0.001). CONCLUSION: The combined use of IMCI and pulse oximetry in health centres increased the number of diagnosed severe childhood pneumonia. TRIAL REGISTRATION NUMBER: PACTR201807164196402.