Functional diversity metrics have been suggested as important indicators of ecosystem functioning. We investigated the effects of land use mediated by local environmental variables on the fish assemblages’ functional structure in 18 headwater streams distributed in the Upper Paraná and Iguaçu ecoregions. The species were characterized according to habitat use, food resource use, life history, and hypoxia tolerance. We calculated functional diversity indices richness (FRic), evenness (FEve), divergence (FDiv), dispersion (FDis), diversity (RaoQ) and functional rarity indices distinctiveness (Disti), uniqueness (Uni), and evaluated the effects of regional and local variables on these indices using generalized linear models. The results highlighted the occurrence of the most functionally distinct and unique species in the forested streams. Moreover, we observed higher FRic in streams sampled in argisol, with a high ammonia load and low habitat diversity. Forested and agricultural covers positively affected FDis and RaoQ. Urban cover had a negative effect on FDis and RaoQ, mainly due to the increase in generalist functional groups in urban streams. Our findings emphasize the importance of forested cover in maintaining specialized species in fish assemblages of streams and preserving functional diversity and ecosystem functioning. Furthermore, these results contribute to direct conservation and recovery measures in freshwater environments.