Soil erosion and the subsequent sedimentation are the major environmental problems in Ethiopia. The objectives of this study were modelling and estimating the actual soil loss and sediment yield as well as to identify the major erosion prone and sediment source areas in Lay Fanikura watershed. The study attempted to modelling the spatial distribution of erosion and sediment yield of Lay Fanikura watershed. Sediment yield is mainly dependent on factors of soil erosion such as rainfall erosivity, soil erodibilty, land use land cover (C and P) and topography (LS) and sediment delivery ratio of the watershed to the total amount of sediment yield. Main stream channel slope-based sediment delivery ratio analysis was also calculated. Soil map (1:250,000), Aster DEM (30 × 30 m), Thematic mapper image (30 m × 30 m) of the year 2021, rainfall records from five rain gauge stations, and topographic map (1:50,000) were the major data sources. The results indicated that the rate of actual soil loss in the watershed ranged from 0 to 265.3 t ha -1 yr -1 . The average soil erosion was 8.9 t ha -1 yr -1 . The total annual soil loss within the watershed was about 17529 t yr 1 . The soil loss was classified into six severity classes. About 64% of the total area was included in slight class, 11% moderate, 6% high, 10% very high,5% severe and 3% very severe classes. The annual sediment yield was also ranged from 0 to 69 t ha -1 yr -1 and SDR of 0.17 to 0.32. The results can be used to identify the soil erosion hot spots and develop the best soil erosion management practices and help estimate the quantity of soil that was transported into the downstream of Lake Tana. The most critical sediment source areas are situated in the steepest upper part of the watershed. Sustainable land management practices have to be conducted in the upper part of the watershed by taking each stream order as a management unit to add the storage capacity. The Revised Universal Soil Loss Equation and SDR models could be used to model soil loss and sediment yield of Lay Fanikura watershed.