Alternative stable states in shallow lakes are typically characterized by submerged macrophyte (clear-water state) or phytoplankton (turbid state) dominance. However, a clear-water state may occur in eutrophic lakes even when macrophytes are absent. To test whether sediment algae could cause a regime shift in the absence of macrophytes, we developed a model of benthic (periphyton) and planktonic (phytoplankton) primary production using parameters derived from a shallow macrophyte-free lake that shifted from a turbid to a clear-water state following fish removal (biomanipulation). The model includes a negative feedback effect of periphyton on phosphorus (P) release from sediments. This in turn induces a positive feedback between phytoplankton production and P release. Scenarios incorporating a gradient of external P loading rates revealed that (1) periphyton and phytoplankton both contributed substantially to whole-lake production over a broad range of external P loading in a clear-water state; (2) during the clear-water state, the loss of benthic production was gradually replaced by phytoplankton production, leaving whole-lake production largely unchanged; (3) the responses of lakes to biomanipulation and increased external P loading were both dependent on lake morphometry; and (4) the capacity of periphyton to buffer the effects of increased external P loading and maintain a clear-water state was highly sensitive to relationships between light availability at the sediment surface and the of P release. Our model suggests a mechanism for the persistence of alternative states in shallow macrophyte-free lakes and demonstrates that regime shifts may trigger profound changes in ecosystem structure and function.