Sedimentary, palynological and diatom data from a dunefield lake deposit in the interior of Vanderlin Island in the Gulf of Carpentaria are presented. Prior to the formation of present perennial lake conditions, the intensified Australian monsoon associated with the early Holocene marine transgression allowed Cyperaceae sedges to colonise the alluvial margins of an expansive salt flat surrounded by an open Eucalyptus woodland. As sea level stabilised between 7500 and 4500 cal yr B.P. coastal dunes ceased to develop allowing dense Melaleuca forest to establish in a Restionaceae swamp. Dune-sand input into the swamp was diminished further as the increasingly dense vegetation prevented fluvial and aeolian transported sand arriving from coastal sources. This same process impounded the drainage basin allowing a perennial lake to form between 5500 and 4000 cal yr B.P. Myriophyllum and other aquatic taxa colonised the lake periphery under the most extensive woodland recorded for the Holocene. The palynological data support an effective precipitation model proposed for northern Australia that suggests more variable conditions in the late Holocene. A more precise measure of effective precipitation change is provided by diatom-based inferences that indicate few changes in lake hydrology. Such interpretations are explained in terms of palynological sensitivity to adjustments in local fire regimes where regional precipitation change may only be recorded indirectly through fire promoting mechanisms, including intensified ENSO periodicity and human impact.