Phonology is an important foundation of reading development; however, little is known about the neural substrates of speech sound processing and reading development in autistic children. We investigated early auditory event-related potentials (ERPs) in response to speech sounds and their association with reading ability (word recognition and reading comprehension). 56 kindergarteners (28 ASD, 28 TD) completed an ERP task using rhyming, bisyllabic pseudowords (/gibu/ and /bidu/) in an old/new design: 50% “old” and 50% “new” stimuli presented following a sensitization block of 100% “old” stimuli. Behavioral measures of reading ability were completed at kindergarten entry and exit. Results from generalized linear mixed models revealed a significant three-way interaction between stimuli (“new” vs. “old”), diagnosis (ASD vs. TD), and reading ability (for word recognition and reading comprehension) for P1 and P2 amplitude. Follow-up analyses revealed that autistic children with lower reading abilities showed greater P1 and P2 amplitudes for “new” vs. “old” stimuli, with effects ranging from marginal to significant (p’s 0.04–0.07). Regression analyses revealed that old/new ERP difference scores significantly predicted later word recognition at kindergarten year-end (P1 amplitude: p = .05; P2 amplitude: p = .04), but not reading comprehension, controlling for sex and nonverbal IQ. Autistic children with poorer reading skills, specifically those with weaker word recognition abilities, show neural differences when processing speech sounds compared to autistic peers with greater reading ability and typically developing children. A better understanding of the neural basis of speech sound processing could enhance our insight into the heterogeneity in reading among individuals with ASD and guide future treatment approaches.