Much of the exceptional diversity of cichlid fishes in the African Great Lakes can be explained by geographic variation among isolated populations of species specialised to live on patchily distributed rocky habitat. However, there are also many endemic species that are not specialised for rocky shores. These appear to experience weaker geographic isolation. Major decreases in lake volume may have segregated such populations in isolated refugia in the distant past, but subsequent range changes have likely eliminated most of the phylogeographic signal of these events. Divergence in currently isolated peripheral water bodies may be more amenable to the study of recent processes of allopatric divergence. We investigate a haplochromine cichlid fish, here referred to as Lethrinops sp. ‘chilingali’, isolated in a small satellite lake near Lake Malawi, and the candidate sister taxon, Lethrinops lethrinus, which inhabits shallow muddy habitats in the main lake and associated water bodies. The satellite lake form from Lake Chilingali showed significant morphological differentiation, with a less ventrally-placed mouth and shorter snout, associated with a shift in diet from a diverse range of benthic invertebrates towards specialisation on mid-water chaoborid larvae and pupae. The Lake Chilingali population showed substantially reduced mitochondrial DNA diversity and no haplotype sharing was observed with populations from the main lake system. In laboratory experiments, putative species showed a high degree of assortative mating and territorial males were significantly more aggressive towards intruders of their own population. This study adds to the evidence that rapid evolution of novel phenotypes in peripheral habitats can add to the diversity of lacustrine cichlids through the evolution of at least partial reproductive isolation in allopatry.