Urban estuaries are subject to a variety of ecological crises caused by humans as a result of rising shore-based human activities. In this study, environmental variables, community composition, structure and diversity indices of benthic macroinvertebrate were studied to assess the ecological health status of an urbanized estuary, Karnaphuli river estuary. The results revealed that dissolved oxygen (DO) was very low, and organic matter was much higher in the estuary. There were significant (p < 0.05) differences among the environmental variables across the sites. 31 taxa were identified yielding a total of 49167 Ind./m2 with overall mean density (±SD) of 159 (±327) Ind./m2. Annelida (61.8%) were the most abundant taxonomic group followed by Polychaeta (34.88%) and Oligochaeta (26.92%). The high abundance of pollution indicator taxa (Tubificidae, Capitellidae) and low abundance of pollution sensitive taxa (Lumbrinidae, Sabellidae, Maldanidae, Nephtyide) indicated detrimental ecological condition. The values of Shannon-Wiener diversity index (1.95–2.63), Pielou's evenness index (0.60–0.81) and the Margalef diversity index (1.03–2.12) suggested moderate pollution status with extremely low species richness and low abundance in polluted areas. A PERMANOVA showed significant differences in faunal assemblages (F = 2.189, p < 0.001) among sites. Species abundance and density were higher (p = 0.32) at the upper estuary (where pH and salinity were low) and reduced in the middle and lower portion of the estuary which reflected the gradient of pollution level. Cluster analysis (CA) demarcated three distinct communities in terms of species similarity. SIMPER identified the highest average dissimilarity value (66.66%) across all the stations. The Canonical Correspondence Analysis (CCA) results suggested benthic macroinvertebrate community was influenced by environmental variables, for instance, salinity, dissolve oxygen, soil and water pH, total dissolved solids, and sediment texture.