Developmental dyslexia is characterised as an inability to read fluently. Apart from literacy problems, dyslexics have other language difficulties including inefficient speech encoding and deficient novel word learning. Yet, the neural mechanisms underlying these impairments are largely unknown. We tracked online formation of neural memory traces for a novel spoken word-form in dyslexic and normal-reading children by recording the brain’s electrophysiological response dynamics in a passive perceptual exposure session. Crucially, no meaning was assigned to the new word-form nor was there any task related to the stimulus, enabling us to explore the memory-trace formation of a purely phonological form in the absence of any short-term or working memory demands. Similar to previously established neural index of rapid word learning in adults, the control children demonstrated an early brain response enhancement within minutes of exposure to the novel word-form that originated in frontal cortices. Dyslexic children, however, lacked this neural enhancement over the entire course of exposure. Furthermore, the magnitude of the rapid neural enhancement for the novel word-form was positively associated with reading and writing fluency. This suggests that the rapid neural learning mechanism for online acquisition of novel speech material is associated with reading skills. Furthermore, the deficient online learning of novel words in dyslexia, consistent with poor rapid adaptation to familiar stimuli, may underlie the difficulty of learning to read.