Construction of a large dam is one of the major economic and development activities that change the existing land use patterns in an area. The major visible impact of dam construction is the inundation of important land uses/ land cover in the reservoir area. This study was conducted to assess the land use/ land cover changes as the result of DeduruOya reservoir construction. Multi temporal satellite images acquired through Google earth were used to identify the land use/ land cover of the reservoir area before and after dam construction. In addition, land use/ land cover changes in a 100 m buffer zone from the reservoir were also evaluated. A total of approximately 1178 ha land was inundated by water which included 40% of paddy, 30% of coconutand 27% of forest lands. The loss of paddy production per year due to this inundation was 5,144kg per displaced family according to the analysis creating Rs. 19.81 million of net income loss annually to the country. The economic loss from coconut land was Rs. 64.60 million per year. The economic loss per family as a result of paddy and coconut production foregone is, therefore Rs.144,240/year. Since their food security and income seemed to have been affected severely due to the reservoir construction, the authorities are required to address the livelihood changes of resettled population and make remedial measures as early as possible.The study suggests a comprehensive assessment of the impacts on people due to physical and livelihood displacement.