<b><i>Background:</i></b> Fractures among older people are common, but there is scant evidence about the impact of fractures on functional decline in an unselected older population. <b><i>Objective:</i></b> The objective of this study was to analyze the impact of lower and upper body fractures on functional performance among older adults during an 8-year follow-up. <b><i>Methods:</i></b> A population-based cohort of 616 Finnish persons aged 65 and over was followed for up to 8 years, and the association between fractures and the risk of short-term (0–2 years) and long-term (up to 8 years) functional decline was analyzed. Fractures were categorized according their functional influence on mobility and activities of daily living (ADL) into lower and upper body fractures. Multivariate cumulative logistic regression model was used in the analyses. <b><i>Results:</i></b> During the 8-year follow-up, 112 (18%) persons sustained at least one fracture. In the multivariate analyses, lower body fractures predicted both short-term and long-term decline in mobility [cumulative odds ratio (COR) 4.7, 95% confidence interval (95% CI) 1.9–11.7 and COR 2.6, 95% CI 1.1–6.2, respectively] and in ADL performance (COR 3.1, 95% CI 1.3–7.6 and COR 4.7, 95% CI 2.0–11.4, respectively). Upper body fractures predicted decline in ADL performance during the long-term follow-up (COR 2.5, 95% CI 1.3–4.8). Pre-fracture functional decline and inactivity in leisure time physical exercise were independently associated with the risk of decline in extensive activities. <b><i>Conclusion:</i></b> Fractures have an independent influence on the development of functional decline in older persons regardless of the pre-fracture health. Prevention of falls and fractures and improvement of treatment, rehabilitation and follow-up process after fractures are needed.