Summary Background A quarter of people with psychotic conditions experience persistent auditory verbal hallucinations, despite treatment. AVATAR therapy (invented by Julian Leff in 2008) is a new approach in which people who hear voices have a dialogue with a digital representation (avatar) of their presumed persecutor, voiced by the therapist so that the avatar responds by becoming less hostile and concedes power over the course of therapy. We aimed to investigate the effect of AVATAR therapy on auditory verbal hallucinations, compared with a supportive counselling control condition. Methods We did this single-blind, randomised controlled trial at a single clinical location (South London and Maudsley NHS Trust). Participants were aged 18 to 65 years, had a clinical diagnosis of a schizophrenia spectrum (ICD10 F20–29) or affective disorder (F30–39 with psychotic symptoms), and had enduring auditory verbal hallucinations during the previous 12 months, despite continued treatment. Participants were randomly assigned (1:1) to receive AVATAR therapy or supportive counselling with randomised permuted blocks (block size randomly varying between two and six). Assessments were done at baseline, 12 weeks, and 24 weeks, by research assessors who were masked to therapy allocation. The primary outcome was reduction in auditory verbal hallucinations at 12 weeks, measured by total score on the Psychotic Symptoms Rating Scales Auditory Hallucinations (PSYRATS–AH). Analysis was by intention-to-treat with linear mixed models. The trial was prospectively registered with the ISRCTN registry, number 65314790. Findings Between Nov 1, 2013, and Jan 28, 2016, 394 people were referred to the study, of whom 369 were assessed for eligibility. Of these people, 150 were eligible and were randomly assigned to receive either AVATAR therapy (n=75) or supportive counselling (n=75). 124 (83%) met the primary outcome. The reduction in PSYRATS–AH total score at 12 weeks was significantly greater for AVATAR therapy than for supportive counselling (mean difference −3·82 [SE 1·47], 95% CI −6·70 to −0·94; p<0·0093). There was no evidence of any adverse events attributable to either therapy. Interpretation To our knowledge, this is the first powered, randomised controlled trial of AVATAR therapy. This brief, targeted therapy was more effective after 12 weeks of treatment than was supportive counselling in reducing the severity of persistent auditory verbal hallucinations, with a large effect size. Future multi-centre studies are needed to establish the effectiveness of AVATAR therapy and, if proven effective, we think it should become an option in the psychological treatment of auditory verbal hallucinations. Funding Wellcome Trust.