Palygorskite-bearing claystones and mudstones were deposited in a salt lake in the middle and lower parts of the Neogene Baiyanghe Formation in the Yangtaiwatan Basin, China. The petrological, mineralogical and geochemical characteristics of the sediments were investigated to determine the factors controlling palygorskite formation. The palygorskite claystones and mudstones have distinctly varying mineral compositions. The claystones are composed of detrital minerals, palygorskite and illite, whereas the mudstones consist mainly of mixed-layer illite/smectite and illite. The palygorskite crystals were intact with sharp edges and interwoven with other minerals, indicating an authigenic origin. The chemical characteristics indicate that the palygorskite claystones in the middle part of the Baiyanghe Formation were deposited in a salt lake environment in an arid and hot climate. As the salinity of the lake gradually increased, the detrital minerals such as quartz, feldspar, dolomite and detrital clay minerals dissolved in the alkaline medium, thus providing Si4+, Mg2+ and Al3+ for the crystallization of palygorskite. The palygorskite coexists with certain amounts of detrital quartz and feldspar with limited roundness and sorting, indicating that the shallow lake of the basin under an oxidation environment may represent a favourable environment for the crystallization of palygorskite.