Previous research has demonstrated that there is a negative relationship between ethnic diversity in a local community and social cohesion. Often the way social cohesion is assessed, though, varies across studies and only some aspects of the construct are included (e.g., trust). The current research explores the relationship between diversity and social cohesion across a number of indicators of social cohesion including neighbourhood social capital, safety, belonging, generalized trust, and volunteering. Furthermore, social psychological theories concerning the role of positive contact and its impact on feelings of threat are investigated. Using a sample of 1070 third generation ‘majority’ Australians and structural equation modelling (SEM), findings suggest ethnic diversity is related to positive intergroup contact, and that contact showed beneficial impacts for some indicators of social cohesion both directly and indirectly through reducing perceived threat. When interethnic contact and perceived threat are included in the model there is no direct negative effect between diversity and social cohesion. The theoretical implications of these findings are outlined including the importance of facilitating opportunities for positive contact in diverse communities.