This question tests the understanding of the ecological impact of dams. The correct answer is 'C. Loss of fertile silt in downstream areas' because when a dam stops the natural flooding, it also prevents the silt from reaching downstream, which is crucial for fertility in agricultural areas. Option A is incorrect because dams often disrupt the natural habitat and can decrease fish populations. Option B is not necessarily true as dams can sometimes lead to water stagnation and poorer water quality. Option D is incorrect because while dams can regulate water flow, they do not necessarily reduce the risk of drought.