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Abstract Mega dams in lowland tropical forests often create large archipelagos, leading to biodiversity decay and disruption of ecosystem functioning in remnant habitat islands. We investigated the functional diversity and functional trait filtering of aerial insectivorous bats in both insular forest patches created by a vast ~30‐year‐old hydropower reservoir and the adjacent mainland continuous forest in Central Amazonia. Bats were surveyed using passive bat recorders across 34 forest sites. Based on a set of morphological traits derived for each species recorded, we estimated both the bat functional richness, functional evenness and functional dispersion at each surveyed site. We further assessed the effects of local vegetation, patch and landscape features on patterns of functional diversity. The interaction between functional traits, environmental characteristics, and species distribution was investigated using a combination of RLQ and fourth‐corner analyses. We found that mainland sites retained higher functional richness and lower functional evenness compared to forest islands, indicating a more complete functional assemblage in the mainland. Additionally, species composition was affected by local vegetation structure and forest area, with small isolated islands exhibiting pervasive loss of functional traits. RLQ and fourth‐corner analyses showed that larger understorey foraging species with greater dispersal capacity, constant frequency–frequency modulated calls, and higher frequency of maximum energy were associated with more isolated small islands. Conversely, forest subcanopy species, exhibiting quasi‐constant frequency calls and presenting low dispersal capacity were associated with continuous forests and islands with greater forest area, and were therefore more sensitive to habitat insularization. Our study calls attention to the pervasive impacts induced by large dams on the functional diversity of tropical insectivorous bats. We recommend that future assessments of the effects of habitat fragmentation on mammals should include traits linked to ecosystem services. In designing and licensing new dams, we suggest the creation of extensive protected areas surrounding mainland forests to minimize the detrimental impacts of small isolated islands and safeguard the full complement of key ecological functions provided by insectivorous bats. Read the free Plain Language Summary for this article on the Journal blog.