Neuroimaging studies of childhood onset schizophrenia (COS), a rare yet severe form of schizophrenia with an onset before the age of 13 years, have shown continuity with adult onset schizophrenia. Previous research in adult patients has shown reduced sleep spindle activity, transient oscillations in the sleep electroencephalogram (EEG) generated through thalamocortical loops. The current study examines sleep spindle activity in patients with COS. Seventeen children and adolescents with COS (16 years ±6.6) underwent overnight sleep EEG recordings. Sleep spindle activity was compared between patients with COS and age and gender matched controls and correlated with clinical symptom severity. We found pronounced deficits in sleep spindle amplitude, duration, density and frequency in patients with COS (effect size = 0.61 to 1.96; dependent on metric and EEG derivation). Non-rapid eye movement (NREM) sleep EEG power and coherence in the sigma band (11–16 Hz) corresponding to spindle activity were also markedly diminished in patients with COS as compared to controls. Furthermore, the degree of deficit in power and coherence of spindles was strongly associated with clinician rated hallucinations and positive symptoms over widespread cortical regions. Our finding of diminished spindle activity and its association with hallucinations likely reflect dysfunction of the thalamocortical circuits in children and adolescents with COS. Given the relative ease of sleep EEG recordings in vulnerable populations, this study highlights the potential of such recordings to characterize brain function in schizophrenia.