Recent studies regarding the effect of mood on the DRM (Deese-Roediger-McDermott) illusion have not been able to clearly establish yet whether valence or arousal is most critical in determining susceptibility to false memories, nor what the underlying processes are. In three experiments, both the valence and the level of arousal of participants' mood were manipulated. Six conditions were used: positive mood with high/low arousal, negative mood with high/low arousal, neutral mood, and a control condition. Memory was tested by means of immediate and delayed recognition and immediate free recall. The mood induction procedure was effective. For recognition memory, there was an effect of arousal on the endorsement of critical lures. Low-arousal moods elicited more false recognition than high-arousal moods, regardless of valence. Based on signal detection analyses, the effect was attributed to more liberal response criteria with low arousal, in combination with a tendency towards improved item-specific memory with high arousal.