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Noise, as an unwanted sound, has become one of modern society’s environmental conundrums, and many children are exposed to higher noise levels than previously assumed. However, the effects of background noise on central auditory processing of toddlers, who are still acquiring language skills, have so far not been determined. The authors evaluated the effects of background noise on toddlers’ speech-sound processing by recording event-related brain potentials. The hypothesis was that background noise modulates neural speech-sound encoding and degrades speech-sound discrimination.Obligatory P1 and N2 responses for standard syllables and the mismatch negativity (MMN) response for five different syllable deviants presented in a linguistic multifeature paradigm were recorded in silent and background noise conditions. The participants were 18 typically developing 22- to 26-month-old monolingual children with healthy ears.The results showed that the P1 amplitude was smaller and the N2 amplitude larger in the noisy conditions compared with the silent conditions. In the noisy condition, the MMN was absent for the intensity and vowel changes and diminished for the consonant, frequency, and vowel duration changes embedded in speech syllables. Furthermore, the frontal MMN component was attenuated in the noisy condition. However, noise had no effect on P1, N2, or MMN latencies.The results from this study suggest multiple effects of background noise on the central auditory processing of toddlers. It modulates the early stages of sound encoding and dampens neural discrimination vital for accurate speech perception. These results imply that speech processing of toddlers, who may spend long periods of daytime in noisy conditions, is vulnerable to background noise. In noisy conditions, toddlers’ neural representations of some speech sounds might be weakened. Thus, special attention should be paid to acoustic conditions and background noise levels in children’s daily environments, like day-care centers, to ensure a propitious setting for linguistic development. In addition, the evaluation and improvement of daily listening conditions should be an ordinary part of clinical intervention of children with linguistic problems.