In this study, we examined the effect of within-category diversity on people's ability to learn perceptual categories, their inclination to generalize categories to novel items, and their ability to distinguish new items from old. After learning to distinguish a control category from an experimental category that was either clustered or diverse, participants performed a test of category generalization or old-new recognition. Diversity made learning more difficult, increased generalization to novel items outside the range of training items, and made it difficult to distinguish such novel items from familiar ones. Regression analyses using the generalized context model suggested that the results could be explained in terms of similarities between old and new items combined with a rescaling of the similarity space that varied according to the diversity of the training items. Participants who learned the diverse category were less sensitive to psychological distance than were the participants who learned a more clustered category.