Background: Frailty and poor psychological functioning remain major aging-related public and clinical health challenges. The multidimensional nature of these constructs, along with diverse assessment methods, complicate the study of their relationship. This systematic review aims to examine the cross-sectional and longitudinal relationships between frailty and psychological functioning and explore how their interplay affects health-related outcomes in community-dwelling older adults. Methods: We conducted a systematic search of MEDLINE, Embase, Emcare, PsycINFO, CINAHL, Web of Science, and Scopus for English-language articles published between January 2001 and November 2024. Two authors independently screened studies, extracted data, and performed quality assessment. Data were analysed descriptively. Results: A total of 129 studies were included, covering 113 distinct cohorts of community-dwelling older adults from 37 countries. Cross-sectional analyses consistently revealed positive associations of frailty with depression, psychological distress, and apathy, and negative associations with mental well-being, optimism, and sense of coherence, with mixed findings for anxiety. Longitudinal studies showed that baseline depression, apathy, and poor mental vitality predicted frailty progression, while frailty at baseline predicted incident depression and worsened mental health. The interaction between frailty and depression was associated with poorer health outcomes, including increased mortality, functional disability, and hospitalisation risks. Conclusions and implications: Community-based frailty management strategies should consider a broader range of psychological factors, such as mental vitality, apathy, and mental well-being. Further research is needed to explore additional psychological dimensions beyond depression and anxiety, and their relationship with frailty and aging-related health outcomes.