Background: There is now considerable evidence from around the world that racism is associated with both mental and physical ill-health. However, little is known about the mediating factors between racism and ill-health. This paper investigates relationships between racism and self-assessed mental and physical health among Indigenous Australians as well as potential mediators of these relationships. Methods. A total of 164 adults in the Darwin Region Urban Indigenous Diabetes (DRUID) study completed a validated instrument assessing interpersonal racism and a separate item on discrimination-related stress. Self-assessed health status was measured using the SF-12. Stress, optimism, lack of control, social connections, cultural identity and reactions/responses to interpersonal racism were considered as mediators and moderators of the relationship between racism/discrimination and self-assessed health status. Results: After adjusting for socio-demographic factors, interpersonal racism was significantly associated with the SF-12 mental (but not the physical) health component. Stress, lack of control and feeling powerless as a reaction to racism emerged as significant mediators of the relationship between racism and general mental health. Similar findings emerged for discrimination-related stress. Conclusions: Racism/discrimination is significantly associated with poor general mental health among this indigenous population. The mediating factors between racism and mental health identified in this study suggest new approaches to ameliorating the detrimental effects of racism on health. In particular, the importance of reducing racism-related stress, enhancing general levels of mastery, and minimising negative social connections in order to ameliorate the negative consequences of racism.