We have previously studied the genetics of schizophrenia in a large inbred Arab-Israeli pedigree and found evidence for linkage on chromosome 20p13. This locus harbours four strong candidate genes for schizophrenia: atractin (ATRN), pantonate-kinase2 (PANK2), oxytocin (OXT) and arginine-vasopressin (AVP). In this study we further explored the association of these genes with schizophrenia in the pedigree and searched for the disease-causing variants. A mutation screening of affected individuals from the pedigree was performed by using intensive sequencing in these four genes of interest. Then, we studied the prevalence of the identified variants in all family members (n=56) as well as in Arab-Israeli nuclear families (n=276) and a Jewish case-control sample (n=545). We also studied the possible functional role of these variants by examining their association with gene expression in the brain (n=104). We identified seven genetic variants in the OXT-AVP cluster in affected individuals from the pedigree. Three of these variants were significantly associated with schizophrenia in this pedigree. A 7-SNP haplotype was also significantly associated with disease. We found significant association of some of these variants in the two samples from the general population. Expression data analysis showed a possible functional role of two of these variants in regulation of gene expression. Involvement of OXT and AVP in the aetiology of schizophrenia has been suggested in the past. This study demonstrates, for the first time, a significant genetic association of these neuropeptides with schizophrenia and strongly supports this hypothesis.