Neuropsychological studies provide evidence for an ageing-related decline of memory for contextual information related to remembered items. Using event-related fMRI we investigated the neural correlates of ageing-related changes during encoding and retrieval of spatial contextual memory. Eighteen young and 17 older subjects were included in the analysis (mean age 24 and 60 years, respectively). Although young and older subjects recognised the same amount of items during retrieval, spatial context memory for remembered items was superior in younger subjects. In both groups, left parahippocampal activity during encoding predicted contextual memory performance during retrieval. During encoding, an interaction between age and success of spatial context encoding was found in the left fusiform gyrus. During retrieval, the left hippocampal formation showed higher activity for successful than for unsuccessful spatial context retrieval as well as an interaction between age and spatial context judgement. Both findings are likely to underlie the contextual memory deficit observed in older subjects.