Naturally, every individual strives for getting satisfaction and to avoid negative outcomes. A future oriented fear of a sort without avoidance refers to anxiety, which, in its mild state acts as a source of motivation, however, it may lead to malfunctioning in its severe form. The present study aimed to investigate the prevalence of anxiety among the students at university level and to find out its influences over academic performance. The study also focused on the major causal factors or correlates of anxiety among university students. Few researches have been carried out on anxiety as a vital psychological aspect of academic performance and to analyze its causal factors among university students, specifically in Pakistan. The main objective of the study was to determine the anxiety levels of university students and to compare it with their academic grades in the last exam. The study was significant as its findings and conclusions may support the university teachers, administrators and examination conducting authorities to adopt appropriate strategies for teaching and evaluation, while keeping in view the anxiety levels of students. It also seems helpful for university students to overcome academic dysfunction caused by severe anxiety. To achieve the stated objectives, the master level students of 16th grade of University of Peshawar, Khyber Pakhtunkhwa, Pakistan were selected out of which thirty percent (proportionate) sample from 32 postgraduate departments of all of the six faculties, for the session 2011-12 was taken. The total number of students taken was758, (n=758), including 442 males and 316 females. The research involved a descriptive non-experimental correlation design. The anxiety levels of students were determined through the standard self-report mechanism by applying the Beck Anxiety Inventory (BAI). The academic grades in the form ofxv percent score in the last annual examination were taken and compared among the university students having anxieties of high and low level. The data collected was tabulated, analyzed and interpreted through SPSS v.19, by using means, percentages and Pearson’s product moment correlation coefficient (r). The causal factors of anxiety among university students were determined through academic, environmental, social and future oriented correlates. On average, the students with high and low levels of anxiety were found with a ratio of 40 to 60, respectively, while the students with high and low academic grades were found with a ratio of 65 to 35, respectively. The study concluded with an inverse relation between anxiety and academic grades of university students (r=-0.38) and the academic correlates were found to be the only causal factors of anxiety among the university students. Finally, discussions were made and hierarchic suggestions were presented to optimize the severe anxiety among university students to ensure better academic performance.