Individuals suffering from Tullio phenomena experience dizziness, vertigo, and reflexive eye movements (nystagmus) when exposed to seemingly benign acoustic stimuli. The most common cause is a defect in the bone enclosing the vestibular semicircular canals of the inner ear. Surgical repair often corrects the problem, but the precise mechanisms underlying Tullio phenomenon are not known. In the present work we quantified the phenomenon in an animal model of the condition by recording fluid motion in the semicircular canals and neural activity evoked by auditory-frequency stimulation. Results demonstrate short-latency phase-locked afferent neural responses, slowly developing sustained changes in neural discharge rate, and nonlinear fluid pumping in the affected semicircular canal. Experimental data compare favorably to predictions of a nonlinear computational model. Results identify the biophysical origin of Tullio phenomenon in pathological sound-evoked fluid-mechanical waves in the inner ear. Sound energy entering the inner ear at the oval window excites fluid motion at the location of the defect, giving rise to traveling waves that subsequently excite mechano-electrical transduction in the vestibular sensory organs by vibration and nonlinear fluid pumping.