Sleep, circadian rhythms, and mental health are reciprocally interlinked. Disruption to the quality, continuity, and timing of sleep can precipitate or exacerbate psychiatric symptoms in susceptible individuals, while treatments that target sleep—circadian disturbances can alleviate psychopathology. Conversely, psychiatric symptoms can reciprocally exacerbate poor sleep and disrupt clock-controlled processes. Despite progress in elucidating underlying mechanisms, a cohesive approach that integrates the dynamic interactions between psychiatric disorder with both sleep and circadian processes is lacking. This review synthesizes recent evidence for sleep—circadian dysfunction as a transdiagnostic contributor to a range of psychiatric disorders, with an emphasis on biological mechanisms. We highlight observations from adolescent and young adults, who are at greatest risk of developing mental disorders, and for whom early detection and intervention promise the greatest benefit. In particular, we aim to a) integrate sleep and circadian factors implicated in the pathophysiology and treatment of mood, anxiety, and psychosis spectrum disorders, with a transdiagnostic perspective; b) highlight the need to reframe existing knowledge and adopt an integrated approach which recognizes the interaction between sleep and circadian factors; and c) identify important gaps and opportunities for further research.