Psychosocial stimulation is one of the recommended interventions in the management of hospitalised children with severe acute malnutrition (SAM). However, there is currently limited scientific evidence supporting the effectiveness of the intervention. The study aimed to examine the effects of psychosocial stimulation on the development, nutrition, and treatment outcomes of hospitalised SAM children. A cluster-randomised controlled trial was conducted among health facilities that provide inpatient care for children with SAM in Silti Zone, Ethiopia. Fifty-eight children enrolled in the intervention facilities were provided stimulation intervention during their inpatient care and for 6 months after discharge. Sixty-eight children enrolled from control health facilities received routine inpatient care without stimulation and were followed for six months. Health education was provided to all caregivers on child health-related topics. Child development and nutrition outcomes were assessed four times using Denver II-Jimma and anthropometric measurements while the length of hospitalisation was used to measure treatment outcome. Children in the intervention group showed significantly better scores in Personal Social (p=0.001, effect size=0.77), Fine Motor (p=0.001, effect size=1.87), and Gross Motor (p=0.001, effect size=0.78) developmental domains from baseline to end line. Language domain however showed a significant difference only after discharge and intervention children scored better at six months (p<0.001, effect size=0.59). The intervention significantly improved treatment outcomes (p=0.010), but no significant changes in nutritional outcomes were documented. The findings highlighted the benefits of the intervention and the need to promote these interventions in health facilities within resource-limited settings.