Research frequently demonstrates diverse communities exhibit lower intra-community cohesion. Recent studies suggest there is little evidence perceived ethnic threat plays a role in this relationship. This paper re-examines the roles of ethnic threat and prejudice in the diversity/cohesion relationship. First, we test threat/prejudice as conceptualised in the literature: as mediators of diversity's effect. Second, we test a reformulation of the roles of threat/prejudice: as moderators of diversity's effect. Applying multi-level models to cross-sectional and longitudinal data of White British individuals across England and Oldham (a unique English town case-study) we find neighbour-trust lower in diverse communities. However, perceived-threat/prejudice does not mediate this relationship. Instead, we find perceived-threat/prejudice moderate diversity's impact on neighbour-trust. The result is diversity only reduces neighbour-trust among individuals who already viewed out-groups as threatening. Longitudinal analysis confirms the importance of out-group attitudes in the diversity/neighbour-trust relationship. In diverse communities, residents whose out-group attitudes improve, or worsen, become more, or less, trusting of their neighbours. However, in homogeneous communities, changes in out-group attitudes are not linked to changes in neighbour-trust. We therefore argue and demonstrate that perceived-threat emerges from other societal processes (such as socio-economic precariousness) and it is when individuals who already view out-groups as threatening experience diverse neighbourhoods that local cohesion declines.