Objective We sought to investigate the incidence of, and factors associated with, in‐hospital functional decline among older acute hospital patients. Methods We conducted a prospective observational study of consecutive patients admitted under geriatric medicine over 5 years. The primary outcome measure was functional decline between admission and discharge, representing deterioration in any of the following: Modified Barthel Index (MBI), independence in Timed Up and Go test or walking, and/or need for walking aid. Results Overall, 56% (950/1693) patients (mean age 81.9 years) exhibited in‐hospital functional decline. Premorbid MBI (odds ratio (OR) 1.05 per unit increase, P < 0.001), adverse drug reaction (OR 1.50, P = 0.001) and in‐hospital consultation as the referral source (OR 1.57, P = 0.001) were independently associated with functional decline, adjusting for age, dementia and nursing home residence. Conclusion These factors may aid identification of vulnerable patients who might particularly benefit from targeted multidisciplinary intervention. Further studies validating this, and exploring the impact of focussed management, are needed.