Prior to receiving distribution through
21st Century Film Corporation,
Warner Bros. and
Universal Pictures screened the film, expressing potential interest, but only agreed to purchase it for distribution contingent on the film's gore sequences being significantly truncated. Scavolini refused, as he felt "the strongest scenes had to remain uncut because the film should be a scandalous event." 21st Century Film Corporation purchased the film for distribution, though it was released with an
X rating in 117 New York theaters on October 23, 1981. During its first week of screening in New York City, some theater locations stayed open 24 hours a day to show the film all day and night as a
marketing gimmick. It opened in regional markets the following month, premiering in
Louisville, Kentucky on November 27, 1981, before releasing in Los Angeles in April 1982. In February 1984,
David Hamilton-Grant, Malcolm Fancey, and Roger Morley—each executives of the film's British distribution company—were arrested and faced prosecution for releasing the film in a cut unauthorized by the
British Board of Film Classification (BBFC), which included 48 seconds of footage that the BBFC had not approved. Hamilton-Grant and Fancey were sentenced to 18 and 9 months imprisonment, respectively, while Morley received a fine of £250. Bill Carlton of the
New York Daily News also lambasted the film, granting it a 0-star rating and criticizing its violence, declaring: "This is the most repulsive, offensive, degrading, gory, depraved and horrifying movie ever made."
Stephen Hunter of
The Baltimore Sun described it as "wretchedly filmed" and deemed it a "garish atrocity, a new low in the cinema of depravity." The
Los Angeles Timess Linda Gross compared the film to
Taxi Driver (1976) and
Halloween (1978), and described it as a "gruesome and vicious movie." Dale Schneck of
The Morning Call praised the film for its performances and suspense, summarizing it as "gory, gut-wrenching,
nihilistic filmmaking. It is sure to cause some sleepless nights for moviegoers whose most frightening nightmare is the recall of this outrageous new film."
TV Guide was critical of the film, noting: "Given its earnest claims to
Freudian psychological complexity, this pretentious gorefest (recipient of a self-imposed X rating) would be laughable if it weren't so repulsive."
Home media Nightmare was released on
VHS in the United States in 1982 by Planet Video. The government action brought against the film in the United Kingdom led to a
black market for it in the mid-late 1980s, where the cost of video copies reached .
Seattle-based home media distributor
Code Red released a two-disc 30th Anniversary special edition
DVD in 2011, which was reissued as a 35th Anniversary edition in 2015. A limited edition
Blu-ray was also issued by Code Red in 2014. In May 2018,
Kino Lorber announced a reissue of the Blu-ray in conjunction with Code Red scheduled for a July 17, 2018 release, but it did not materialize. In 2023, Severin Films announced a 3-disc
4K UHD edition, with a 99-minute cut of the film sourced from U.S. and European internegatives. In addition to special features including an interview with Tom Savini, who was erroneously credited as special effects director, the release contained a full-length documentary:
Damaged: The Very British Obscenity of David Hamilton-Grant. Also, Severin Films released a novelization written by Michael Gingold, which features scenes not included in the movie. ==Legacy==