Unraveling the molecular mechanisms for COVID-19-associated encephalopathy and its immunopathology is crucial for developing effective treatments. Here, we utilized single-cell transcriptomic analysis and integrated clinical observations and laboratory examination to dissect the host immune responses and reveal pathological mechanisms in COVID-19-associated pediatric encephalopathy. We found that lymphopenia was a prominent characteristic of immune perturbation in COVID-19 patients with encephalopathy, especially those with acute necrotizing encephalopathy (AE). This was characterized a marked reduction of various lymphocytes (e.g., CD8+ T and CD4+ T cells) and significant increases in other inflammatory cells (e.g., monocytes). Further analysis revealed activation of multiple cell apoptosis pathways (e.g., granzyme/perforin-, FAS- and TNF-induced apoptosis) may be responsible for lymphopenia. A systemic S100A12 upregulation, primarily from classical monocytes, may have contributed to cytokine storms in patients with AE. A dysregulated type I interferon (IFN) response was observed which may have further exacerbated the S100A12-driven inflammation in patients with AE. In COVID-19 patients with AE, myeloid cells (e.g., monocytic myeloid-derived suppressor cells) were the likely contributors to immune paralysis. Finally, the immune landscape in COVID-19 patients with encephalopathy, especially for AE, were also characterized by NK and T cells with widespread exhaustion, higher cytotoxic scores and inflammatory response as well as a dysregulated B cell-mediated humoral immune response. Taken together, this comprehensive data provides a detailed resource for elucidating immunopathogenesis and will aid development of effective COVID-19-associated pediatric encephalopathy treatments, especially for those with AE.