Headwater catchments are often perceived to be remote and peripheral and therefore neglected, least developed and economically backward. However, changes in headwater regions have repercussions far beyond their borders. The Uporoto highlands form the headwater region for the Ruaha River and Kiwira River drainage systems that are of great significance to Tanzania. Village settlements development, population growth, and poor land management along the water divide have contributed to gully erosion that is a potential hazard. Using a case of Igoma, the largest village settlement in the region, the paper establishes the link between settlement growth and degradation of headwater catchments. It discusses the opportunities and hazards of the gullies to the local communities. The paper further draws lessons for rural settlement development and gives recommendations for minimizing the negative impacts of degradation of the headwater environment. Lastly, it creates awareness on the apparently neglected potential environmental hazard in the Uporoto Highlands.