Language processing encompasses a sophisticated interplay of phonological (sound-based) and semantic (meaning-based) processes. This intricate interaction develops progressively during early language acquisition. It involves not only the addition of new words to the child’s vocabulary but also the evolving organization of lexico-semantic networks. The aim of the current research was to investigate how young children navigate the complexities of word relationships, with a focus on the interplay between phonological similarity and semantic relatedness. A preferential looking experiment was conducted involving 73 participants divided into two age groups, with 39 aged 18 months and 34 aged 24 months. The experimental design involved auditory presentation of target words together with pairs of target and distractor images that systematically varied the phonological and semantic similarity between the pairs. The results showed a significant developmental progression in young children’s phonological and semantic processing abilities. At 18 months, children predominantly responded to phonological cues, displaying challenges in distinguishing between phonologically similar words regardless of semantic context. By 24 months, there was an evident sensitivity to both phonological and semantic cues. This age group especially showed processing difficulties with words that were both phonologically similar and semantically related, suggesting a more complex integration of lexico-semantic networks. These findings underscore the pivotal role of phonological processing in early language acquisition and point to the gradual integration of semantic relationships into children’s lexicons.