From “Bedfellows”, Psychology Today:

Sleep disturbances and depression are such intransigent bedfellows that troubled sleep is considered a hallmark of the mood disorder. At least 80% of depressed people experience insomnia -- difficulty falling asleep or, most often, staying asleep. Indeed, early morning awakening is a virtual giveaway of depression.

But it may be that insomnia is more than just a symptom of depression. It may in fact unleash the mood disorder. If sleep researcher Michael Perlis, Ph.D., is right, insomnia may be an early harbinger of depression . . . In a complex mix of chemistry and behavior, disordered sleep may actually bring on depression, setting in motion an array of forces in the nervous system that result, ultimately, in a frank depressive episode. Most intriguing, treating the insomnia may forestall a first episode of depression or recurrent disorder, or at least keep it from becoming chronic.

It isn't just that depression sufferers wake up early and get less sleep. The makeup of their sleep is shattered. Normal sleep has a well-defined architecture. Four or five times a night we cycle through periods of deepening, relaxing sleep, marked by slow waves if the brain is monitored electronically. Then we burst into dream sleep, marked by dramatic brain activity and rapid eye movements. Depressed people lapse quickly into REM sleep [think: chasing ball], as if they were in a hurry to get to the highly emotionally charged activity. "For some reason, there is a lot of pressure to get into it," says Perlis. And it's unusual both in duration and intensity, more dense, intense and longer-lasting.

The fast track to dreamland is not a good thing. "There's something about dreaming that is meaningful in depression," Perlis says, intriguing the Freudian lurking in all of us.
But exactly what it is is not quite clear. "It certainly looks like REM sleep represents an abnormality in the neurobiologic machinery of dreaming," says Perlis. "But there is still something wrong with the way that the depressed dream; the function of dreaming is undermined."

One of the functions of sleep is to facilitate the consolidation of memory. REM sleep in particular is involved with affective, or emotional, memory. "There's something wrong with the memories depressed people are consolidating and the way that the REM system is mood-regulating," says Perlis.

The intense activation of REM sleep in the depressed may lead to the overconsolidation of negative memory, rendering the depressed overly biased to remember bad things. They do not discharge negative feelings over time.