Squat lobsters have a worldwide distribution and are highly visible crustaceans living in a broad range of habitats. In this study, partial sequences of two mitochondrial DNA genes (16S rRNA and COI) and a nuclear gene (H3) were obtained for all but one of the known species of the shallow-water genera Sadayoshia (Munididae) and Lauriea, Macrothea and Triodonthea (Galatheidae). Lauriea siagiani appeared to be phylogenetically closer to Triodonthea and Macrothea than to other Lauriea species, suggesting the need for taxonomic re-evaluation of these taxa. All species of Sadayoshia formed a monophyletic group that would have diverged during the Paleogene (around 50 Mya). Our results support the hypothesis that the late Paleogene–Neogene transition was a period of rapid diversification for shallowwater species of both Galatheidae and Munididae in the Indo-Pacific region. This is probably related to high tectonic activity among the Eurasian, Philippine Sea, Indo-Australian and Pacific plates and corresponding changes in distribution of habitats and ocean currents during the late Paleogene. Finally, the tropical south-west Pacific province is identified as a major diversification centre for shallow-water squat lobsters, from where species dispersed to other Pacific and Indian Ocean regions.