This paper identifies factors associated with variation in psychosocial distress among adolescents in a relatively deprived and ethnically diverse inner city setting in London, UK. The research draws on literature which discusses whether neighbourhood socio-economic conditions are associated with mental health, as well as attributes of individual adolescents and their families. We report an analysis of data from the Research with East London Adolescents: Community Health Survey (RELACHS). The survey collected data on mental health measured by the Strengths and Difficulties Questionnaire (SDQ), and on various aspects of individual and family circumstances. These data were linked with information about social and economic conditions in 'middle layer standard output areas' (MSOA) used for the population Census 2001, having a mean total population of 6767 in the study area. Census statistics including the Indices of Deprivation for 2004 proposed by the Office of the Deputy Prime Minister, were used to describe the socio-economic conditions within these areas. Although the socio-economic disparities among small areas were not typical of those across the whole of the country, there were differences in levels of deprivation and crime, social fragmentation, and ethnic composition. A Bayesian regression analysis using Gibbs sampling in the programme WinBugs investigated whether there was variability in SDQ at both individual and area (MSOA) level, and whether the predictor variables at both levels were significantly associated with SDQ. Individuals from Asian or Black ethnic groups, and those in families with harmonious relationships and no financial stress had significantly lower SDQ scores, i.e. better health. Those who had special educational needs or long standing illness, or were from reconstituted families had significantly worse SDQ scores. About 6% of the variation in SDQ was associated with area differences. However, this area variation was not related to differences in area indicators of socio-economic deprivation, crime or social fragmentation. There was a complex association between SDQ and ethnic composition of neighbourhoods.