This study tested the hypothesis that variable freshwater flow in the Gippsland Lakes, Australia, influences the location and extent of environmental conditions suitable for spawning and larval development of black bream, Acanthopagrus butcheri. Freshwater flow had a large influence on the salinity and level of stratification (difference between bottom and surface salinity) in the Gippsland Lakes. Freshwater flows throughout this study varied from no or low flows through to major flooding in 2007. Eggs of A. butcheri were found in similar concentrations throughout the lakes and rivers. More than 99% of larvae, however, were collected from within rivers, with very few larvae being collected from the lakes. A comparison of two spawning seasons revealed that the year with higher freshwater flows also had greater spawning activity and higher concentrations of larvae. Interestingly, there was a significant relationship between the distribution of eggs and larvae with the level of stratification. The highest concentrations of larvae occurred at sites with a difference in bottom and surface salinities of 15–20. This study demonstrates that despite A. butcheri spawning in the lakes and rivers, it is only locations with a halocline that function as larval nursery habitat.