Seven infants with chronic neonatal lung disease and baseline oxygen saturation greater than 90% were studied with overnight polysomnography in their prescribed oxygen environment, and on a second night with 0.25 L/min additional oxygen. All had sleep fragmentation and decreased rapid-eye-movement (REM) sleep, which was reversed after the increased oxygen. Sleep duration (p < 0.003), percentage REM sleep (p < 0.001), and mean REM sleep period length (p < 0.001) were increased, and arousals in REM sleep decreased (p < 0.05), with improved oxygenation. We conclude that, in infants with chronic neonatal lung disease, arousal mechanisms minimise oxygen desaturation but induce sleep disruption.