Many falls in older people occur while walking, however the mechanisms responsible for gait instability are poorly understood. Therefore, the aim of this study was to develop a plausible model describing the relationships between impaired sensorimotor function, fear of falling and gait patterns in older people. Temporo-spatial gait parameters and acceleration patterns of the head and pelvis were obtained from 100 community-dwelling older people aged between 75 and 93 years while walking on an irregular walkway. A theoretical model was developed to explain the relationships between these variables, assuming that head stability is a primary output of the postural control system when walking. This model was then tested using structural equation modeling, a statistical technique which enables the testing of a set of regression equations simultaneously. The structural equation model indicated that: (i) reduced step length has a significant direct and indirect association with reduced head stability; (ii) impaired sensorimotor function is significantly associated with reduced head stability, but this effect is largely indirect, mediated by reduced step length, and; (iii) fear of falling is significantly associated with reduced step length, but has little direct influence on head stability. These findings provide useful insights into the possible mechanisms underlying gait characteristics and risk of falling in older people. Particularly important is the indication that fear-related step length shortening may be maladaptive.