Current data demonstrate a high rate of comorbidity between sleep disorders and various psychiatric illnesses, especially mood and anxiety disorders. The disturbance of sleep quality and continuity that is associated with many sleep disorders predisposes to the development or exacerbation of psychological distress and mental illness. Likewise, the presence of psychiatric illness may complicate the diagnosis and treatment of sleep disorders. This focused review examines the literature concerning the interaction between major International Classification of Sleep Disorders, 2nd edition, diagnoses and psychiatric conditions with respect to sleep findings in various psychiatric conditions, psychiatric comorbidity in sleep disorders, and reciprocal interactions, including treatment effects. The data not only underscore the high frequency of psychopathology and psychological distress in sleep disorders, and vice versa, but also suggest that combined treatment of both the mental disorder and the sleep disorder should become the standard for effective therapy for all patients.