Emergence of coherent structures and patterns at the nonlinear stage of modulation instability of a uniform state is an inherent feature of many biological, physical and engineering systems. There are several well-studied classical modulation instabilities, such as Benjamin–Feir, Turing and Faraday instability, which play a critical role in the self-organization of energy and matter in non-equilibrium physical, chemical and biological systems. Here we experimentally demonstrate the dissipative Faraday instability induced by spatially periodic zig-zag modulation of a dissipative parameter of the system—spectrally dependent losses—achieving generation of temporal patterns and high-harmonic mode-locking in a fibre laser. We demonstrate features of this instability that distinguish it from both the Benjamin– Feir and the purely dispersive Faraday instability. Our results open the possibilities for new designs of mode-locked lasers and can be extended to other fields of physics and engineering.