New evidence is accumulating for a deficit in binding visual-orthographic information with the corresponding phonological code in developmental dyslexia. Here, we identify the mechanisms underpinning this deficit using event-related brain potentials (ERPs) in dyslexic and control adult readers performing a letter-matching task. In each trial, a printed letter was presented synchronously with an auditory letter name. Incongruent (mismatched), frequent trials were interleaved with congruent (matched) infrequent target pairs, which participants were asked to report by pressing a button. In critical trials, incongruent letter pairs were mismatched but confusable in terms of their visual or phonological features. Typical readers showed early detection of deviant trials, indicated by larger modulation in the range of the phonological mismatch negativity (PMN) compared with standard trials. This was followed by stronger modulation of the P3b wave for visually confusable deviants and an increased lateralized readiness potential (LRP) for phonological deviants, compared with standards. In contrast, dyslexic readers showed reduced sensitivity to deviancy in the PMN range. Responses to deviants in the P3b range indicated normal letter recognition processes, but the LRP calculation revealed a specific impairment for visual-orthographic information during response selection in dyslexia. In a follow-up experiment using an analogous non-lexical task in the same participants, we found no reading-group differences, indicating a degree of specificity to over-learnt visual-phonological binding. Our findings indicate early insensitivity to visual-phonological binding in developmental dyslexia, coupled with difficulty selecting the correct orthographic code.