Objective: To observe the effect of modified Chaihu Guizhi Longgu Muli decoction on the psychological status and sleep in patients with liver depression and qi stagnation type of insomnia. Methods: A total of 144 patients with insomnia of liver depression and qi stagnation type were selected and divided into two groups according to treatment methods: the control group (n=72) received conventional Western medicine treatment, while the treatment group (n=72) was treated with modified Chaihu Guizhi Longgu Muli decoction. Both groups were treated for 4 weeks. The clinical efficacy, TCM syndrome scores, psychological status (Hamilton Depression Scale [HAMD] and Hamilton Anxiety Scale [HAMA] scores), sleep quality (Pittsburgh Sleep Quality Index [PSQI], Insomnia Severity Index [ISI] scores), serum neurotransmitters (cortisol [Cor], epinephrine [E]) before and after treatment, and incidence of adverse reactions were compared between the two groups. Results: The overall response rate in the treatment group was higher than that in the control group (P<0.05). After 4 weeks of treatment, the scores of TCM syndromes, PSQI, ISI, HAMD, and HAMA in both groups were decreased compared with those before treatment, and the treatment group showed lower scores (P<0.05). The levels of Cor and E in both groups at 4 weeks of treatment were decreased compared with those before treatment, and the treatment group showed lower levels (P<0.05). The incidence of adverse reactions in the treatment group was lower than that in the control group (P<0.05). Conclusion: Modified Chaihu Guizhi Longgu Muli decoction can effectively regulate psychological status and sleep in patients with insomnia of liver depression and qi stagnation type, with few adverse reactions and high safety.