Background An earthquake measuring 6.3 on the Richter scale struck the city of Bam in Iran on the 26th of December 2003 at 5.26 A.M. It was devastating, and left over 40,000 dead and around 30,000 injured. The profound tragedy of thousands killed has caused emotional and psychological trauma for tens of thousands of people who have survived. A study was carried out to assess psychological distress among Bam earthquake survivors and factors associated with severe mental health in those who survived the tragedy. Methods This was a population-based study measuring psychological distress among the survivors of Bam earthquake in Iran. Using a multi-stage stratified sampling method a random sample of individuals aged 15 years and over living in Bam were interviewed. Psychological distress was measured using the 12-item General Health Questionnaire (GHQ-12). Results In all 916 survivors were interviewed. The mean age of the respondents was 32.9 years (SD = 12.4), mostly were males (53%), married (66%) and had secondary school education (50%). Forty-one percent reported they lost 3 to 5 members of their family in the earthquake. In addition the findings showed that 58% of the respondents suffered from severe mental health as measured by the GHQ-12 and this was three times higher than reported psychological distress among the general population. There were significant differences between sub-groups of the study sample with regard to their psychological distress. The results of the logistic regression analysis also indicated that female gender; lower education, unemployment, and loss of family members were associated with severe psychological distress among earthquake victims. Conclusion The study findings indicated that the amount of psychological distress among earthquake survivors was high and there is an urgent need to deliver mental health care to disaster victims in local medical settings and to reduce negative health impacts of the earthquake adequate psychological counseling is needed for those who survived the tragedy.