Parrots are among the most recognisable and widely distributed of all bird groups occupying major parts of the tropics. The evolution of the genera that are found in and around the Indian Ocean region is particularly interesting as they show a high degree of heterogeneity in distribution and levels of speciation. Here we present a molecular phylogenetic analysis of Indian Ocean parrots, identifying the possible geological and geographical factors that influenced their evolution. We hypothesise that the Indian Ocean islands acted as stepping stones in the radiation of the Old-World parrots, and that sea-level changes may have been an important determinant of current distributions and differences in speciation. A multi-locus phylogeny showing the evolutionary relationships among genera highlights the interesting position of the monotypic Psittrichas, which shares a common ancestor with the geographically distant Coracopsis. An extensive species-level molecular phylogeny indicates a complex pattern of radiation including evidence for colonisation of Africa, Asia and the Indian Ocean islands from Australasia via multiple routes, and of island populations 'seeding' continents. Moreover, comparison of estimated divergence dates and sea-level changes points to the latter as a factor in parrot speciation. This is the first study to include the extinct parrot taxa, Mascarinus mascarinus and Psittacula wardi which, respectively, appear closely related to Coracopsis nigra and Psittacula eupatria.