The development of emotional regulation capacities in children at high versus low risk for externalizing disorder was examined in a longitudinal study investigating: (a) whether disturbances in emotion regulation precede and predict the emergence of externalizing symptoms and (b) whether sensitive maternal behavior is a significant influence on the development of child emotion regulation. Families experiencing high (n = 58) and low (n = 63) levels of psychosocial adversity were recruited to the study during pregnancy. Direct observational assessments of child emotion regulation capacities and maternal sensitivity were completed in early infancy, at 12 and 18 months, and at 5 years. Key findings were as follows. First, high-risk children showed poorer emotion regulation capacities than their low-risk counterparts at every stage of assessment. Second, from 12 months onward, emotion regulation capacities showed a degree of stability and were associated with behavioral problems, both concurrently and prospectively. Third, maternal sensitivity was related to child emotion regulation capacities throughout development, with poorer emotion regulation in the high-risk group being associated with lower maternal sensitivity. The results are consistent with a causal role for problems in the regulation of negative emotions in the etiology of externalizing psychopathology and highlight insensitive parenting as a potentially key developmental influence.