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Objective: There is increasing interest in the relations between adverse early experiences and subsequent psychiatric disorders. Institutional rearing is considered an adverse caregiving environment, but few studies have systematically examined its effects. This study aimed to determine whether removing young children from institutional care and placing them with foster families would reduce psychiatric morbidity at 54 months of age. Method: Young children living in institutions in Bucharest were enrolled when they were between 6 and 30 months of age. Following baseline assessment, 136 children were randomly assigned to care as usual (continued institutional care) or to removal and placement in foster care that was created as part of the study. Psychiatric disorders, symptoms, and comorbidity were examined by structured psychiatric interviews of caregivers of 52 children receiving care as usual and 59 children in foster care when the children were 54 months of age. Both groups were compared to 59 typically developing, never-institutionalized Romanian children recruited from pediatric clinics in Bucharest. Foster care was created and supported by social workers in Bucharest who received regular consultation from U.S. clinicians. Results: Children with any history of institutional rearing had more psychiatric disorders than children without such a history (53.2% versus 22.0%). Children removed from institutions and placed in foster families were less likely to have internalizing disorders than children who continued with care as usual (22.0% versus 44.2%). Boys were more symptomatic than girls regardless of their caregiving environment and, unlike girls, had no reduction in total psychiatric symptoms following foster placement. Conclusions: Institutional rearing was associated with substantial psychiatric morbidity. Removing young children from institutions and placing them in families significantly reduced internalizing disorders, although girls were significantly more responsive to this intervention than boys.