Reservoir sedimentation is a gradual accumulation of the incoming sediment load from a river. The main reason of land degradation and reservoir sedimentation is soil erosion. So that, modelling of sediment yield and runoff is very important. The Arc SWAT 2012 (Soil and Water Assessment Tool) model was selected for the prediction of runoff and sediment yield from Fato watershed into Fato Dam reservoir. The overall goal of this study focused on sediment yield prediction, identification of the most appropriate sediment management strategy within the scope of this study. The m o d e l was calibrated and validated for both flow and sediment concentration at Fato station and run at Fato dam reservoir outlet (99.52km 2 ) to estimate the sediment Yield. Flow calibration gives coefficient of determination (R2) and Nash-Sutcliffe simulation efficiency (ENS) 0.79 and 0.76 respectively. Flow validation gives 0.79 and 0.78 for R2 and ENS values respectively. Sediment calibration gives R2 and ENS 0.75 and 0.72 respectively and validation test gives R2 and ENS 0.78 and 0.72 respectively. This result indicates t hat the observed values show good agreement with simulated value for both flow and sediment yield. In this study, the SWAT model yields average annual sediment of 430,322 ton/year/ or 43.24 ton/ha/year at Fato outlet dam site. Annual average variability of runoff and sediment yield in the sub basins ranges from 26.21mm to 43.91mm and 24.40t/ha/yr to 63.21 ton/ha/yr respectively. Sub basin 3, 23, 37 and 28 ranks first to fourth according to their Sediment yield respectively and found as erosion prone areas. For proper management of the watershed, from the scenarios developed, changing 20% of agricultural land to forest mixed reduces 15.107% of sediment volume and taken as best management method. Moreover, applying terracing and filter strip in low slope areas reduces 12.3% and 12.78% of sediment volume respectively and could give potential effect of best management practice. Key words Arc SWAT, sediment Yield, Runoff Estimation , Fato Watershed, SWAT CUP.