Insomnia is prevalent, severe and partially heritable. Unfortunately, its neuronal correlates remain enigmatic, hampering the development of mechanistic models and rational treatments. Consistently reported impairments concern fragmented sleep, hyper-arousal and executive dysfunction. Because fronto-striatal networks could well play a role in sleep, arousal regulation and executive functioning, the present series of studies used an executive task to evaluate fronto-striatal functioning in disturbed sleep. Patients with insomnia showed reduced recruitment of the head of the left caudate nucleus during executive functioning, which was not secondary to altered performance or baseline perfusion. Individual differences in caudate recruitment were associated with hyper-arousal severity. Seed-based functional connectivity analysis suggested that attenuated input from a projecting orbitofrontal area with reduced grey matter density contributes to altered caudate recruitment in patients with insomnia. Attenuated caudate recruitment persisted after successful treatment of insomnia, warranting evaluation as a potential vulnerability trait. A similar selective reduction in caudate recruitment could be elicited in participants without sleep complaints by slow-wave sleep fragmentation, providing a model to facilitate investigation of the causes and consequences of insomnia.