To investigate the incidence of dengue virus (DENV) infection in Nicaragua, a 2-year prospective study was conducted in schoolchildren 4-16 years old in the capital city of Managua. Blood samples were collected before the rainy season in 2001, 2002 and 2003, and were assayed for DENV-specific antibodies. Participants were monitored for dengue-like illness, and acute and convalescent blood samples were collected from suspected dengue cases. In 2001 and 2002, 602 and 397 students were recruited, respectively, and paired annual serum samples were available from 467 and 719 participants in 2001-2002 and 2002-2003, respectively. The overall seroprevalence of anti-DENV antibodies was 91%, increasing from 75% at age 4 to 100% at age 16. The incidence of DENV infection was 12% in Year 1 and 6% in Year 2 (P < 0.001). During Year 1, four laboratory-confirmed dengue cases were detected, with one DENV2 isolate; during Year 2, there were six confirmed dengue cases, with one DENV1 isolate. These and additional circulating serotypes were confirmed by plaque reduction neutralisation test. This study demonstrates surprisingly high transmission of DENV in urban Nicaragua.