Objective To determine whether there is an association between body mass index (BMI) and body esteem in young overweight and obese urban children, and to test peer relationship difficulties and perceived physical health as mediators of this relationship. Methods Child self‐reported body esteem, and parent‐reported child peer relationship difficulties (being bullied by peers and peer rejection) and physical health perceptions were obtained from 218 overweight and obese children aged 5–7 years (81% racial/ethnic minority, M BMI = 25.3) and their primary caregivers. Results Higher BMI was associated with lower body esteem for both girls and boys. This relation was mediated by poor physical health for boys but not for girls. Peer relationship difficulties did not mediate the observed association between BMI and body esteem in either group; however, girls with higher BMI experienced more bullying and being bullied by peers was associated with lower body esteem in girls. Conclusions Intervening with perceptions of physical health may buffer overweight and obese boys from developing low body esteem in early childhood.