Land is a scarce economic resource in the highlands of Ethiopia. Its sustainable use is extremely affected by different factors. From the factors, land fragmentation is a worldwide trait of agricultural systems which influence farmland productivity. Henceforth, this study was carried out to investigate the level of land fragmentation and its effects on farmland productivity and Sustainable Land Management (SLM) in the upper Lake Tana basin of Dera Woreda. Data on land fragmentation was collected using GPS and GIS tools and a survey was conducted on 194 farm households, 1,059 parcels and FGD to secure data on socioeconomic issues and insight of respondents on land fragmentation and associated variable. Simple descriptive and inferential statistics were applied to analyze socioeconomic, demographic and the perception of farmers about land-related factors. Analysis of land fragmentation using the Simpson index indicated 74%, implying that there is a high degree of land fragmentation in the study area. The data was also analyzed by using linear, semi-log and log-log production functions. In land productivity semi-log model is a leading model, 74.42% of variations in farmland productivity are explained by variations in independent variables including land fragmentation parameters. The significant factors influencing the productivity of the farmland were fragmentation parameter (Simpson index, number of the plot, farm size and walk minute), oxen power intensity and age of the household. A multivariate probit (MVP) model was used to analyze the effect of land fragmentation and related factors on the interdependent investment decisions of SLM practices (Bunds, Manure, permanent erosion control and chemical fertilizer) using a multiple household level survey. The study showed that on average, sample households managed 5.46 parcels in different locations with an average area of 1.5 ha. The MVP model analysis indicates that farmers use two or more practices at plot level by considering substitution and complementarity effects of the practices. The results also revealed how land quality (e.g., slope and soil depth), land fragmentation (Simpson index, parcel size and distance from homestead) influence farmers’ investments in SLM practices. The overall results indicate that farm land fragmentation hinders SLM investments, and land quality parameters also improve or hinder the decisions about investments. Policy makers should consider these various land associated factors in designing and implementing SLM policies and programs. Key Words: Land Fragmentation, Sustainable Land Management, Farm Land Productivity, Parcel, Land quality