To assess health-related quality of life (hrQoL) of children with a mentally ill parent, and its associations with the parent's illness (diagnoses, severity of disease, current symptoms) and family functioning, 51 mentally ill parents rated their children's hrQoL using the KINDL-R, a multidimensional hrQoL questionnaire for children. Parents rated their current psychiatric symptoms on the SCL-14 (Symptom Checklist-14) and family functioning on the FB-A ("Familienbögen"). The parents' therapists (psychologists or psychiatrists) provided psychiatric diagnoses as well as global ratings of disease severity (CGI) and patient's family functioning. Compared to the general population, parents rated their children's hrQoL significantly lower concerning the dimensions "Psychological Well-Being" and "Family': HrQoL ratings were moderately correlated with the parent's current depressive symptoms and moderately to highly correlated with family functioning from the parent's perspective. Lower depression severity and higher family functioning were associated with higher hrQoL ratings. Parents with affective disorders rated their children's hrQoL significantly lower than did parents with a diagnosis of substance abuse. Results show the importance of family functioning for parents' view of children's hrQoL and the influence of psychiatric symptoms on ill parents' reports. These findings are in line with previous results concerning potential psychological and behavioural problems in children of mentally ill parents. Family interventions and multi-informant assessment should be used in this high-risk group.