Feelings of depression and anxiety rose sharply over Christmas, especially in young people, according to a survey led by University College London (UCL).
Despite fewer restrictions than last Christmas, many still said they were worried about high levels of Covid-19 and the risk to friends and family.
Happiness and life satisfaction also dipped in people of all ages.
The pandemic is still affecting people's mental health in many ways, the researchers said.
People's confidence in their government's handling of the Covid pandemic also decreased over Christmas in England and Wales - to the lowest point recorded (in autumn 2020) - but stayed steady in Scotland.
And normal Christmases were abandoned as most people changed travel plans, avoided large gatherings or stayed at home more than expected.
The findings are based on a survey of 31,000 people in the first week of January. It forms part of the Covid-19 Social Study, which has regularly interviewed people since the start of the pandemic.
- three in four people are concerned about NHS treatment for non-Covid problems being cancelled or postponed in the next three months
- two-thirds of people have major worries about hospitals being overwhelmed
- half feel that developing long Covid is a big concern
- 58% are concerned about family or friends catching Covid-19
- only four in 10 people say they fully understand the Covid rules in place at the moment
Despite vaccines protecting the large majority of the UK population from becoming seriously ill with Covid, and no lockdowns being brought in over Christmas, levels of anxiety and depression were "on a par with the same time last year," said Dr Daisy Fancourt, lead author from UCL Institute of Epidemiology and Health Care.
"Our findings suggest that it is not just the presence of social restrictions that affect mental health, but also concerns and stressors relating to high levels of the virus and a high risk of infection.
She added: "The decrease in confidence in government to handle the pandemic likely contributed to the stresses many people faced over this period."
Dr Fancourt said from a psychological point of view, keeping Covid levels as low as possible was recommended.
Brian Dow, from the charity Rethink Mental Illness, said the pandemic was likely to impact people's mental health "for some time to come".
He said: "It's tempting to assume that easing restrictions will automatically lead to an improvement in people's wellbeing, but recovery is rarely linear - the nation's mental health must be a priority for government in the long-term."