Stressful, aversive events are extremely well remembered. Such a declarative memory enhancement is evidently beneficial for survival, but the same mechanism may become maladaptive and culminate in mental diseases such as posttraumatic stress disorder (PTSD). Stress hormones are known to enhance postlearning consolidation of aversive memories but are also thought to have immediate effects on attentional, sensory, and mnemonic processes at memory formation. Despite their significance for our understanding of the etiology of stress-related mental disorders, effects of acute stress at memory formation, and their brain correlates at the system scale, remain elusive. Using an integrated experimental approach, we probed the neural correlates of memory formation while participants underwent a controlled stress induction procedure in a crossover design. Physiological (cortisol level, heart rate, and pupil dilation) and subjective measures confirmed acute stress. Remarkably, reduced hippocampal activation during encoding predicted stress-enhanced memory performance, both within and between participants. Stress, moreover, amplified early visual and inferior temporal responses, suggesting that hypervigilant processing goes along with enhanced inferior temporal information reduction to relay a higher proportion of task-relevant information to the hippocampus. Thus, acute stress affects neural correlates of memory formation in an unexpected manner, the understanding of which may elucidate mechanisms underlying psychological trauma etiology.