Developmental dyslexia is strongly associated with a phonological deficit. Yet, implicit phonological processing (in)capacities in dyslexia remain relatively unexplored. Here we use a neurophysiological response sensitive to experience-dependent auditory memory traces, the mismatch negativity (MMN), to investigate implicit phonological processing of natural speech in dyslexic and normally reading children. In a modified passive oddball design that minimizes the contribution of acoustic processes, we presented non-words that differed by the degree of phonotactic probability, i.e. the distributional frequency of phoneme combinations in a given language. Overall morphology of ERP responses to the non-words indicated comparable processing of acoustic-phonetic stimulus differences in both children groups. Consistent with previous findings in adults, normally reading children showed a significantly stronger MMN response to the non-word with high phonotactic probability (notsel) as compared to the non-word with low phonotactic probability (notkel), suggesting auditory cortical tuning to statistical regularities of phoneme combinations. In contrast, dyslexic children did not show this sensitivity to phonotactic probability. These findings indicate that the phonological problems often reported in dyslexia relate to a subtle deficit in the implicit phonetic-phonological processing of natural speech.