Sleep disturbances are highly prevalent and greatly affect consecutive emotional reactivity, while sleep quality itself can be strongly affected by reactions to previous emotional events. In this review, we shed light on this bidirectional relation through examples of pathology: insomnia and bipolar disorder. We show that both experimental sleep deprivation and insomnia are related to increased emotional reactivity and increased amygdala activation upon emotional stimuli presentation, and that particularly Rapid Eye Movement (REM) sleep is important for emotional processing and reorganization of emotion-specific brain activity. Increased emotional reactivity affects REM sleep quality and sleep spindles, while REM sleep is particularly affected in insomnia, possibly related to condition-specific hyperarousal levels. Normal sleep onset deactivation of brain regions important for emotional processing (amygdala, anterior cingulate cortex (ACC)) is further affected in insomnia. In bipolar disorder, sleep disturbances are common in both symptomatic and nonsymptomatic phases. Both amygdala and ACC volume and function are affected in bipolar disorder, with the ACC showing phase-dependent resting state activity differences. Deficient Gamma-aminobutyric acid (GABA) GABA-ergic activity of this region might play a role in sleep disturbances and their influence on emotional reactivity, given the inhibitory role of GABA on brain activity during sleep and its deficiency in both bipolar disorder and insomnia. Promising findings of normalizing brain activity in both insomnia and bipolar disorder upon treatment may inspire a focus on treatment studies investigating the normalization of sleep, emotional reactivity, and their corresponding brain activity patterns.