The research from the University of Warwick, shows that children reporting frequent nightmares at the age of 12 were three and a half times more likely to suffer from psychotic experiences in early adolescence.
Similarly, experiencing night terrors doubled the risk of such problems, including hallucinations, interrupted thoughts or delusions, researchers said.
Younger children, between two and nine years old, who had persistent nightmares reported by parents had up to one and a half times increased risk of developing psychotic experiences.
Those who have experienced them will be familiar with the sensation of waking suddenly with a sense of fear, worry and possible palpitations, researchers said.
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Night terrors, a sleep disorder, differ from nightmares and occur during deep sleep (non-REM) cycles in the first half of the night.
A night terror bout is often signified by a loud scream and the individual sitting upright in a panicked state, though unaware of any of the involuntary action.
The cohort was assessed six times between the ages of two and nine. The likelihood of experiencing psychotic experiences in adolescence increased with the incidence of nightmares.
Those who only reported one period of recurrent nightmares saw a 16 per cent rise, whereas those who reported three or more sustained periods of nightmares throughout the study saw a 56 per cent increase in risk.
"The best advice is to try to maintain a lifestyle that promotes healthy sleep hygiene for your child, by creating an environment that allows for the best possible quality of sleep," Dr Helen Fisher, of King's College London, added.
The study was published in the journal SLEEP.