This article analyzes the conditions leading to the ‘ethnic packaging’ of the Casbah neighborhood in Mazara del Vallo, Sicily, and the economic and political struggles that ensued. By studying the changing relationship between the neighborhood’s built environment, the racialization of Tunisian migrants and the town’s transitioning economy, it analyzes transformations of the Casbah from a working-class Sicilian neighborhood, to an ‘insanitary’ Tunisian ghetto, to a showcase of the town’s Mediterranean multiculturalism. Through this analysis, the article makes three arguments. Firstly, by showing that ‘ethnic packaging’ does not always lead to gentrification but may engender other types of conflict, it argues that the ‘marketization’ of urban diversity has a variety of consequences tied to cities’ positions in broader geographies of uneven development. Secondly, by showing that the changing racialization of Tunisian migrants was produced both through changes to Mazara’s built environment and through shifting territorial relations within Italy and across the Mediterranean, it develops a multi-scalar analysis of racialization. Thirdly, by showing that Sicilian depictions of Tunisian migrants changed according to shifting understandings of Sicilian modernity vis-à-vis the north of Italy, it argues that Italian immigration discourses develop in relation to internal forms of ‘othering’ of southern Italians.