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Background In Ethiopia, light microscopy is the gold standard for malaria diagnosis although it is not available in most peripheral health facilities. It is time consuming, requires trained personnel and needs careful preparation and application of reagents to ensure quality results. This study was aimed at testing the diagnostic performance of CareStart™ malaria rapid diagnostic test (RDT) with reference to light microscopy for the diagnosis of falciparum and vivax malaria in Ethiopia. Methods Blood samples were collected from 254 patients suspected to have malaria at Kola Diba Health Center in the late malaria transmission peak season from November 2011 to December 2011. The samples were examined immediately by light microscopy and the RDT (CareStart™ Malaria HRP2/pLDH COMBO Test kit). Statistical analysis was performed using SPSS version 16 and the JavaStat two-way contingency table analysis. Results The overall sensitivity and specificity of CareStartTM RDT was found to be 95% (90–97.9%, 95% CI) and 94.2% (90.9–96%, 95% CI), respectively. The sensitivity of the CareStartTM RDT for Plasmodium falciparum or mixed infection was calculated to be 92.9% (82.5–98%, 95%CI) while a sensitivity of 90.9% (74.1–98.4%, 95%CI) was found for non-falciparum species. The specificity for P. falciparum or mixed infections was found to be 95.4% (92.5–96.8%, 95%CI) while it was 97.3% (94.8–98.4%, 95%CI) for non-falciparum species. There was an excellent agreement between the two tests with a kappa value of 0.918. Conclusion The CareStartTM RDT test showed good sensitivity and specificity with an excellent agreement to the reference light microscopy. The RDT could therefore be used in place of light microscopy, which in poor set-ups cannot be used routinely.