The phrase implies a deep emotional distress that can affect one's physical health. Mom was worried sick with visions of an accident when you didn't come home by midnight.
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Colloquial Usage
It's a common informal expression, not suitable for formal writing, but widely understood in conversation. When the news showed the hurricane's damage, I was sick with worry for my friends there.
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Not Literal
Being 'sick with worry' doesn't always mean being physically ill, but describes feeling emotionally overwhelmed. I was worried sick all week about the job interview; I barely slept.