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This paper presents the use of Erosion Potential Method (EPM) for the prediction of runoff and soil loss in the Lapnjak watershed, Polimlje, Montenegro. Ecological factors, which are the basis for the calculation of soil erosion intensity, we included in the EPM model. This allowed the quantification of the environmental effects of soil erosion. Data concerning runoff and sediment yield from the Lapnjak watershed located in North-East Montenegro are reported. The value of the Z coefficient was calculated on 0.268 and the strength of the erosion process is low. Our results suggest that the calculated maximal outflow from the river basin was 111 m³s-1 for the incidence of 100 years. The net soil loss was 856 m per year, specific 124 m³km-2 per year. According to our analysis there is a possibility for large flood waves to appear in the studied river basin. The Erosion Potential method we used in this study is highly recommended for soil erosion modelling in other river basins similar to the studied watershed, because of its simple and reliable identification of critical areas affected by the soil loss caused by soil erosion. It is a useful tool for researchers in calculation of runoff and sediment yield at the level of the river basins in the regions of South East Europe, similar to the studied area of the Lapnjak watershed of the Polimlje basin. [ABSTRACT FROM AUTHOR]