In a mud-lubricated bearing assembly for a downhole motor, a mechanical seal is provided between the mandrel and the lower end of the bearing housing to prevent discharge of drilling fluid (mud) from the bearing assembly into the wellbore annulus. The mechanical seal is effected by mating wear-resistant annular contact surfaces provided on the mandrel and the bearing housing, with biasing means preferably being provided to keep the contact surfaces in sealing engagement during both on-bottom and off-bottom operational modes. The diverted drilling fluid passing through the bearings is redirected into the bore of the mandrel via ports through the mandrel wall to rejoin the main flow to the drill bit, such that substantially all of the drilling fluid flows through the bit.