Direct observation of peer relating is potentially a sensitive and ecologically valid measure of child social functioning, but there has been a lack of standardised methods. The Manchester Inventory for Playground Observation (MIPO) was developed as a practical yet rigorous assessment of this kind for 5-11 year olds. We report on the initial reliability and validity of the MIPO and its ability to distinguish social impairments within different psychopathologies. We observed 144 clinically referred children aged 5;00-11;11 (mean 8.8) years with Externalising (n = 44), Internalising (n = 19), Autism Spectrum Disorders (n = 39) or Specific Language Impairment (n=42), and 44 class-controls, in naturalistic playground interaction. Observers, blind to clinical diagnosis, completed the MIPO and the teacher checklist from the Social Skills Rating System (SSRS). MIPO items showed high internal consistency (alpha = 0.924; all "alpha if item deleted" values greater than 0.91), inter-observer reliability (mean K[subscript w] = 0.77) and test-retest stability (over 2 weeks; mean K[subscript w] = 0.58). MIPO totals showed convergence with SSRS (n = 68, r[subscript s] = 0.78, p less than 0.01) and excellent discrimination between case and control (sensitivity = 0.75 and specificity = 0.88, AUC = 0.897). Externalising, Autistic Spectrum and Language Impaired groups showed distinct profiles of MIPO impairment consistent with theory:Internalising disorders less so. 65.3% of clinical cases were classified accurately for primary diagnosis. The MIPO shows reliability and validity as a measure of children's social functioning relevant in developmental research and as a clinical tool to aid differential diagnosis and intervention planning. (Contains 2 figures and 3 tables.)