Landscape modification alters the condition of ecosystems and the complexity of terrain, with consequences for animal assemblages and ecosystem functioning. In coastal seascapes, dredging is routine practice for extracting sediments and maintaining navigation channels worldwide. Dredging modifies processes and assemblages by favouring species with wide trophic niches, diverse habitat requirements and tolerances to dredge-related eutrophication and sedimentation. Dredging also transforms the three-dimensional features of the seafloor, but the functional consequences of these terrain changes remain unclear. We investigated the effects of terrain modification on the functional diversity of fish assemblages in natural and dredged estuaries to examine whether dredging programs could be optimised to minimise impacts on ecological functioning. Fish assemblages were surveyed with baited remote underwater video stations and variation in functional niche space was described using species traits to calculate metrics that index functional diversity. Terrain variation was quantified with nine complementary surface metrics including depth, aspect, curvature, slope and roughness extracted from sonar-derived bathymetry maps. Functional diversity was, surprisingly, higher in dredged estuaries, which supported more generalist species with wider functional niches, and from lower trophic levels, than natural estuaries. These positive effects of dredging on functional diversity were, however, spatially restricted and were linked to both the area and orientation of terrain modification. Functional diversity was highest in urban estuaries where dredged channels were small (i.e. <1% of the estuary), and where channel slopes were orientated towards the poles (i.e. 171-189°), promoting both terrain variation and light penetration in urban estuaries. Our findings highlight previously unrecognised functional consequences of terrain modification that can easily be incorporated into dredging programs. We demonstrate that restricting the spatial extent of dredging operations and the orientation of dredged channel slopes, wherever this is practical, could help to limit impacts on ecosystem functioning and productivity in urban seascapes.