Sleep and metabolism are inextricably linked and mutually affect each other. Leptin is a pivotal regulator of metabolic homeostasis, but its effect on sleep-wake regulation remains elusive. Here we demonstrate that leptin acts on a small subset of lateral hypothalamic area (LHA) GABAergic neurons to affect sleep-wake behavior. We found that the selective loss of leptin receptors (LepRs) in the LHA causes sleep fragmentation without altering total sleep time, while severe sleep fragmentation in obese LepR-null mice can be rescued by the selective restoration of LHALepR signaling. In vivo Ca2+ imaging revealed that the vast majority of LHALepR+ neurons are REM sleep- and/or wake-active, and chemogenetic activation of LHALepR+ neurons lead to sustained wakefulness. Furthermore, optogenetic activation of LHALepR+ neuron projections to the ventral tegmental area promotes arousal. Collectively, our results identify an important hypothalamic substrate linking metabolic alterations to aberrant sleep-wake patterns in obesity.