Animal studies suggest that N-methyl-D-aspartate receptor (NMDAR) dependent signalling in limbic and prefrontal regions is critically involved in both cognitive and emotional functions. In humans, ketamine-induced transient, and disorder associated chronic NMDAR hypofunction (i.e. in schizophrenia) has been associated with deficient performance in the domains of memory and higher-order emotional functioning, as well as altered neural activity in the underlying limbic-prefrontal circuits. To model the effects of NMDAR hypofunction on the integration of emotion and cognition the present pharmacological fMRI study applied the NMDAR antagonist ketamine (target plasma level=100 ng/ml) to 21 healthy volunteers in a within-subject placebo controlled crossover design during encoding of neutral, positive and negative pictures. Our results show that irrespective of emotion, ketamine suppressed parahippocampal and medial prefrontal activity. In contrast, ketamine selectively increased amygdala and orbitofrontal activity during successful encoding of negative stimuli. On the network level ketamine generally increased medial prefrontal-parahippocampal coupling while specifically decreasing amygdala-orbitofrontal interplay during encoding of negative stimuli. On the behavioural level, ketamine produced generally decreased memory performance and abolished the emotional enhancement of memory after a wash-out period of 5 days. The present findings suggest that ketamine produces general as well as valence-specific effects during emotional memory formation. The pattern partly overlaps with alterations previously observed in patients with schizophrenia.