Large language models (LLMs) have attracted significant attention for potential applications in digital health, while their application in mental health is subject to ongoing debate. This systematic review aims to evaluate the usage of LLMs in mental health, focusing on their strengths and limitations in early screening, digital interventions, and clinical applications. Adhering to PRISMA guidelines, we searched PubMed, IEEE Xplore, Scopus, and the JMIR using keywords: 'mental health OR mental illness OR mental disorder OR psychiatry' AND 'large language models'. We included articles published between January 1, 2017, and December 31, 2023, excluding non-English articles. 30 articles were evaluated, which included research on mental illness and suicidal ideation detection through text (n=12), usage of LLMs for mental health conversational agents (CAs) (n=5), and other applications and evaluations of LLMs in mental health (n=13). LLMs exhibit substantial effectiveness in detecting mental health issues and providing accessible, de-stigmatized eHealth services. However, the current risks associated with the clinical use might surpass their benefits. The study identifies several significant issues: the lack of multilingual datasets annotated by experts, concerns about the accuracy and reliability of the content generated, challenges in interpretability due to the 'black box' nature of LLMs, and persistent ethical dilemmas. These include the lack of a clear ethical framework, concerns about data privacy, and the potential for over-reliance on LLMs by both therapists and patients, which could compromise traditional medical practice. Despite these issues, the rapid development of LLMs underscores their potential as new clinical aids, emphasizing the need for continued research and development in this area.

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