Yes. Sleep deprivation can cause people to hallucinate. Hallucinations are a perception in the absence of a stimulus. It involves perceiving or sensing things while a person is conscious or awake. The hallucinations appear to be real, but hey are created by the person's mind. Someone can experience not only hallucinations they can see, but they can also have auditory hallucinations, which are hearing things without physical stimuli. Command hallucinations are hearing things in the form of a command.
There is also the possibility that someone can have olfactory hallucinations, which are smelling scents and odors that are not physically present. Tactile hallucinations are feeling pressure on the skin or organs with no physical stimulus. Gustatory hallucinations are perceiving specific tastes in the mouth without the physical stimulus. General somatic delusions can create the illusion that the body is being mutilated.
The sense of seeing or hearing objects that don´t in fact exist is what happens when we hallucinate, rather than misperceive stimuli. Hallucinations can occur in different states, but that caused by severe deprivation of sleep is certainly one of them.
The normal mode of rest means that the brain disregards most of the stimuli in the environment - that is the state of arousal is low. After two or three days of sleep loss there may be fleeting hallucinations, and these increase in length and intensity after about 100 hours of sleep deprivation.
As time continues without sleep, some personality disorganization occurs and ultimately even psychosis. We need to have regular periods of rest from attention to the myriads of stimuli surrounding us. 7-9 hours per night keeps us with the best chance of physcial and mental health.