We explored the potential for using Pediastrum (Meyen), a genus of green alga commonly found in palaeoecological studies, as a proxy for lake-level change in tropical South America. The study site, Laguna La Gaiba (LLG) (17°45′S, 57°40′W), is a broad, shallow lake located along the course of the Paraguay River in the Pantanal, a 135,000-km2 tropical wetland located mostly in western Brazil, but extending into eastern Bolivia. Fourteen surface sediment samples were taken from LLG across a range of lake depths (2–5.2 m) and analyzed for Pediastrum. We found seven species, of which P. musteri (Tell et Mataloni), P. argentiniense (Bourr. et Tell), and P. cf. angulosum (Ehrenb.) ex Menegh. were identified as potential indicators of lake level. Results of the modern dataset were applied to 31 fossil Pediastrum assemblages spanning the early Holocene (12.0 kyr BP) to present to infer past lake level changes qualitatively. Early Holocene (12.0–9.8 kyr BP) assemblages do not show a clear signal, though abundance of P. simplex (Meyen) suggests relatively high lake levels. Absence of P. musteri, characteristic of deep, open water, and abundance of macrophyte-associated taxa indicate lake levels were lowest from 9.8 to 3.0 kyr BP. A shift to wetter conditions began at 4.4 kyr BP, indicated by the appearance of P. musteri, though inferred lake levels did not reach modern values until 1.4 kyr BP. The Pediastrum-inferred mid-Holocene lowstand is consistent with lower precipitation, previously inferred using pollen from this site, and is also in agreement with evidence for widespread drought in the South American tropics during the middle Holocene. An inference for steadily increasing lake level from 4.4 kyr BP to present is consistent with diatom-inferred water level rise at Lake Titicaca, and demonstrates coherence with the broad pattern of increasing monsoon strength from the late Holocene until present in tropical South America.