Background An altered pattern of threat processing is deemed critical for the development of anxiety disorders (AD). According to the hypervigilance‐avoidance hypothesis, AD patients show hypervigilance to threat cues at early stages of processing but avoid threat cues at later stages of processing. Consistently, adults with AD show enhanced neurophysiological responses to threat in early time windows and reduced responses to threat in late time windows. The presence of such a hypervigilance‐avoidance effect and its underlying neural sources remain to be determined in clinically anxious children. Methods Twenty‐three children diagnosed with an AD and 23 healthy control children aged 8–14 years saw faces with angry and neutral expressions while whole‐head magnetoencephalography (MEG) was recorded. Neural sources were estimated based on L2‐Minimum Norm inverse source modeling and analyzed in early, midlatency, and late time windows. Results In visual cortical regions, early threat processing was relatively enhanced in patients compared to controls, whereas this relation was inverted in a late interval. Consistent with the idea of affective regulation, the right dorsolateral prefrontal cortex revealed relatively reduced inhibition of early threat processing but revealed enhanced inhibition at a late interval in patients. Both visual‐sensory and prefrontal effects were correlated with individual trait anxiety. Conclusions These results support the hypothesis of early sensory hypervigilance followed by later avoidance of threat in anxiety disordered children, presumably modulated by early reduced and later enhanced prefrontal inhibition. This neuronal hypervigilance‐avoidance pattern unfolds gradually with increasing trait anxiety, reflecting a progressively biased allocation of attention to threat.