The evolution of different colour morphs and how they are maintained in animal populations is poorly understood. We investigated the mechanisms maintaining yellow and brown morphs of a coral-reef fish, Pseudochromis fuscus, at Lizard Island, on the Great Barrier Reef. Histological examination of the gonads revealed that colour morphs were not sex-limited, therefore sexual selection does not appear to promote dichromatism in this species. The field distributions of the two colour morphs were spatially segregated, limiting the opportunity for negative frequency-dependent selection to operate. Our results support another ecological mechanism of coexistence. The yellow morph occurred in deeper areas, usually close to the reef edge, where there was a proportionally high cover of live branching corals. In contrast, the brown morph occurred in shallower areas, more distant from the reef edge, that were proportionally low in live branching corals. Within these habitats, each colour morph of P. fuscus displayed a close association with similar coloured damselfishes from the genus Pomacentrus. The yellow morph was associated with predominantly yellow damselfishes (P. moluccensis and P. amboinensis) and the brown morph with darker coloured species (P. adelus and P. chrysurus). Multiple-choice experiments in the laboratory revealed that: (1) each colour morph of P. fuscus preferentially selected habitat patches occupied by damselfishes with the same colouration; and (2) differences in microhabitat use between the two colour morphs of P. fuscus were due to the presence of different coloured damselfishes in these microhabitats. P. fuscus is a predator of newly recruited damselfishes and the striking resemblance between each morph of P. fuscus and the damselfish with which it was associated, suggests that aggressive mimicry may promote coexistence of P. fuscus colour morphs.