In 1935 an even larger project began downstream of the two earlier dams - the construction of Ladybower Dam, which flooded the area around the junction of the Derwent with the Ashop. This project, first mooted in the early 1920s, caused considerable controversy because it involved the flooding of two villages; Ashopton - which lay at the junction of the Ashop and the Derwent - and Derwent, which lay upstream on the Derwent River. Despite protests the dam went ahead and was finished in 1943, though the reservoir took a further two years to fill. At the time this was the largest reservoir in Britain.

The flooding of the two villages was the worst damage inflicted by the water authorities in their many projects around the Peak District, and highlighted the damage which these can do to the environment - though paradoxically Ladybower is now a major tourist attraction.