BACKGROUND Several European studies have found significant small area variation in the risk of childhood onset (type 1) diabetes (T1D) which has been interpreted as evidence for contextual determinants of T1D. However, this conclusion may be fallacious since the limited number of newborn infants and the low risk for T1D is a source of spurious variability not properly handled by usual statistical methods. This study investigates the existence of contextual effects in the genesis of T1D, compares conclusions in previous reports with results obtained in a multilevel regression framework and highlights analysis of variance as a useful approach in public health. METHODS All singletons born in Sweden between 1987 and 1991 were identified in the Medical Birth Registry (n=560 766) and followed for diabetes until age 14 using the Hospital Discharge Registry. Area variation in the cumulative incidence of T1D was estimated by different statistical methods including multilevel logistic regression. RESULTS The risk of T1D ranged from 4.3 to 6.5 per 1000 newborns across the counties (n=24) and from 0.0 to 19.2 per 1000 newborns across the municipalities (n=284). These differences were significant in standard statistical tests (counties, p=0.02; municipalities, p=0.007). However, according to multilevel analyses, the risk of T1D ranged from 4.7 to 5.7 and from 4.4 to 6.0 per 1000 newborns in counties and municipalities, respectively, and the area variation was small and without practical relevance (counties, sigma(2)=0.006; municipalities, sigma(2)=0.017). CONCLUSIONS Previous reports based on standard statistical tests are misleading. According to multilevel analysis, administrative areas have minor relevance for individual risk of T1D in Sweden.