Theoretically, divergent selection on sensory systems can cause speciation through sensory drive. However, empirical evidence is rare and incomplete. Here we demonstrate sensory drive speciation within island populations of cichlid fish. We identify the ecological and molecular basis of divergent evolution in the cichlid visual system, demonstrate associated divergence in male colouration and female preferences, and show subsequent differentiation at neutral loci, indicating reproductive isolation. Evidence is replicated in several pairs of sympatric populations and species. Variation in the slope of the environmental gradients explains variation in the progress towards speciation: speciation occurs on all but the steepest gradients. This is the most complete demonstration so far of speciation through sensory drive without geographical isolation. Our results also provide a mechanistic explanation for the collapse of cichlid fish species diversity during the anthropogenic eutrophication of Lake Victoria.