Purpose: Deficits in phonological working memory and deficits in phonological processing have both been considered potential explanatory factors in specific language impairment (SLI). Manipulations of the lexicality and phonotactic frequency of nonwords enable contrasting predictions to be derived from these hypotheses. Method: Eighteen typically developing (TD) children and 18 children with SLI completed an assessment battery that included tests of language ability, nonverbal intelligence, and two nonword repetition tests that varied in lexicality and frequency. Results: Repetition accuracy showed that children with SLI were unimpaired for short and simple high-lexicality nonwords, whereas clear impairments were shown for all low-lexicality nonwords. For low-lexicality nonwords, greater repetition accuracy was seen for nonwords constructed from high over low-frequency phoneme sequences. Children with SLI made the same proportion of errors that substituted a nonsense syllable for a lexical item as TD children, and this was stable across nonword length. Conclusions: The data show support for a phonological processing deficit in children with SLI, where long-term lexical and sublexical phonological knowledge mediate the interpretation of nonwords. However, the data also suggest that while phonological processing may provide a key explanation of SLI, a full account is likely to be multifaceted.