The mechanisms underlying hyperarousal, the key symptom of insomnia, have remained elusive, hampering cause-targeted treatment. Recently, restless rapid-eye-movement (REM) sleep emerged as a robust signature of sleep in insomnia. Given the role of REM sleep in emotion regulation, we hypothesized that restless REM sleep could interfere with the overnight resolution of emotional distress, thus contributing to accumulation of arousal. Participants (n = 1,199) completed questionnaires on insomnia severity, hyperarousal, self-conscious emotional distress, and thought-like nocturnal mentation that was validated to be a specific proxy for restless REM sleep (selective fragmentation: R = 0.57, P < 0.001; eye movement density: R = 0.46, P < 0.01) in 32 polysomnographically assessed participants. The experience of distress lasting overnight increased with insomnia severity (β = 0.29, P < 10(-23)), whereas short-lasting distress did not (β = -0.02, P = 0.41). Insomnia severity was associated with hyperarousal (β = 0.47, P < 10(-63)) and with the thought-like nocturnal mentation that is specifically associated with restless REM sleep (β = 0.31, P < 10(-26)). Structural equation modeling showed that 62.4% of the association between these key characteristics of insomnia was mediated specifically by reduced overnight resolution of emotional distress. The model outperformed all alternative mediation pathways. The findings suggest that restless REM sleep reflects a process that interferes with the overnight resolution of distress. Its accumulation may promote the development of chronic hyperarousal, giving clinical relevance to the role of REM sleep in emotion regulation in insomnia, depression, and posttraumatic stress disorder.