A crucial aspect of episodic memory formation is the way in which our experiences are stored within a coherent spatio-temporal context. We review research that highlights how the experience of a negative event can alter memory encoding in a complex manner, strengthening negative items but weakening associations with other items and the surrounding context. Recent evidence suggests that these opposing effects can occur through amygdala up-modulation to facilitate item encoding, while the hippocampal provision of contextual binding is down-modulated. We consider how these characteristics of memory for negative events might contribute to the development and maintenance of distressing intrusive imagery in posttraumatic stress disorder, and how they should influence therapeutic interventions.