Emotion processing abnormalities and sleep pathology are central to the phenomenology of paediatric posttraumatic stress disorder, and sleep disturbance has been linked to the development, maintenance and severity of the disorder. Given emerging evidence indicating a role for sleep in emotional brain function, it has been proposed that dysfunctional processing of emotional experiences during sleep may play a significant role in affective disorders, including posttraumatic stress disorder. Here we sought to examine the relationship between sleep and emotion processing in typically developing youth, and youth with a diagnosis of posttraumatic stress disorder. We use high-density electroencephalogram to compare baseline sleep with sleep following performance on a task designed to assess both memory for and reactivity to negative and neutral imagery in 10 youths with posttraumatic stress disorder, and 10 age- and sex-matched non-traumatized typically developing youths. Subjective ratings of arousal to negative imagery (ΔArousal = post-sleep minus pre-sleep arousal ratings) remain unchanged in youth with posttraumatic stress disorder following sleep (mean increase 0.15, CI -0.28 to +0.58), but decreased in TD youth (mean decrease -1.0, 95% CI -1.44 to -0.58). ΔArousal, or affective habituation, was negatively correlated with global change in slow-wave activity power (ρ = -0.58, p =.008). When considered topographically, the correlation between Δslow-wave activity power and affective habituation was most significant in a frontal cluster of 27 electrodes (Spearman, ρ = -0.51, p =.021). Our results highlight the importance of slow-wave sleep for adaptive emotional processing in youth, and have implications for symptom persistence in paediatric posttraumatic stress disorder. Impairments in slow-wave activity may represent a modifiable risk factor in paediatric posttraumatic stress disorder.