Most models of natural selection assume either that the material environment remains constant or that it fluctuates in ways unrelated to changes in gene frequencies (and therefore changes in the distribution of phenotypes) of the organism undergoing selection. In this paper, we consider what happens when this assumption does not hold, that is, when ecological feedback between organism and environment is included in the evolutionary process. Specifically, we examine the unusual evolutionary dynamics that occur when changes in the distribution of phenotypes (resulting from selection) alter an environmental parameter in ways that, in turn, modify selection pressures. This process, which we term "system-dependent selection", can produce stable phenotypic diversity which functions to regulate the relevant environmental parameter within a much narrower range would occur in the absence of ecological feedback. This environmental regulation raises the mean fitness of the population and reduces variance in fitness among different phenotypes. Thus, system-dependent selection produces functional organization at the level of the system, as a whole, rather than at the level of the individual organism. We use James Lovelock's model of the imaginary planet Daisyworld to describe the unusual dynamics of this selective process and then use a similar model to examine the structure of an ancient system of wet-rice farming on the Indonesian island of Bali. This model accurately predicts the actual structure of functional organization along two Balinese rivers. We investigate the stability of such systems by exploring the conditions under which mutant phenotypes can invade Daisyworld. The results suggest that the phenotypic diversity and functional organization produced by system-dependent selection may be maintained when there exists variation, over evolutionary time, in the environmental parameters underlying system-dependent dynamics.Copyright 1998 Academic Press Limited