Climate warming during the late Permian is associated with the most severe mass extinction event of the Phanerozoic, and the expansion of hypoxic and anoxic conditions in shallow shelf settings. It has been hypothesised that wave aeration provided a ‘habitable zone’ in the shallowest environments that allowed the survival and rapid recovery of benthic invertebrates during the Early Triassic. We test this hypothesis by studying the rock and fossil records of the Aggtelek Karst, Hungary. Nearshore settings recorded in the Bódvaszilas Sandstone Formation and units A and D of the Szin Marl Formation are characterised by taxonomically homogenous fossil assemblages of low diversity and low evenness. Ecological and taxonomic recovery in this environmental setting was hampered by persistent environmental stress. This stress is attributed to increased runoff related to climate warming during the Early Triassic that resulted in large salinity fluctuations, increased sedimentation rates and eutrophication that led to seasonal hypoxia and an environment only favourable for opportunistic taxa. In contrast, shoal and mid-ramp settings further offshore are characterised by high diversity faunas with a greater functional complexity. Prior to the late Spathian Tirolites carniolicus Zone, the shelly fossils and trace fossils are limited to settings aerated by wave activity, which supports the habitable zone hypothesis. In the Tirolites carniolicus Zone, however, the oxygen minimum zone retreats offshore and the habitable deeper shelf settings are rapidly colonised by shallow water taxa, evidenced by the highest levels of diversity and bioturbation recorded in the study. Locally, full recovery of marine ecosystems is not recorded until the Illyrian, with the establishment of a sponge reef complex. •Faunal assemblages in proximal settings are characterised by low diversity and evenness values.•No faunal change was recorded across the Griesbachian/Dienerian boundary•Spathian recovery signal is associated with increased facies heterogeneity.•Outer ramp setting is rapidly colonised by shallow water fauna in the late Spathian.•The most taxonomically and ecologically diverse assemblages are recorded in the late Spathian.