Researchers at Michigan State University and the University of California, Irvine found participants deprived of a night's sleep were more likely to flub the details of a simulated burglary they were shown in a series of images.
Distorted memory can have serious consequences in areas such as criminal justice, researchers said.
"We found memory distortion is greater after sleep deprivation," said Kimberly Fenn, MSU associate professor of psychology and co-investigator on the study.
"And people are getting less sleep each night than they ever have," said Fenn.
The Centres for Disease Control and Prevention in US calls insufficient sleep an epidemic and said it's linked to vehicle crashes, industrial disasters and chronic diseases such as hypertension and diabetes.
The researchers conducted experiments to gauge the effect of insufficient sleep on memory.
Participants who were kept awake for 24 hours and even those who got five or fewer hours of sleep were more likely to mix up event details than participants who were well rested.
"People who repeatedly get low amounts of sleep every night could be more prone in the long run to develop these forms of memory distortion.
"It's not just a full night of sleep deprivation that puts them at risk," Fenn said.
The study was published in the journal Psychological Science.