Progesterone, or rather its neuroactive metabolite allopregnanolone, modulates amygdala activity and thereby influences anxiety. Cognition and, in particular, memory are also altered by allopregnanolone. In the present study, we investigated whether allopregnanolone modulates memory for biologically salient stimuli by influencing amygdala activity, which in turn may affect neural processes in other brain regions. A single progesterone dose was administered orally to healthy young women in a double-blind, placebo-controlled, crossover design, and participants were asked to memorize and recognize faces while undergoing functional magnetic resonance imaging. Progesterone decreased recognition accuracy without affecting reaction times. The imaging results show that the amygdala, hippocampus, and fusiform gyrus supported memory formation. Importantly, progesterone decreased responses to faces in the amygdala and fusiform gyrus during memory encoding, whereas it increased hippocampal responses. The progesterone-induced decrease in neural activity in the amygdala and fusiform gyrus predicted the decrease in memory performance across subjects. However, progesterone did not modulate the differential activation between subsequently remembered and subsequently forgotten faces in these areas. A similar pattern of results was observed in the fusiform gyrus and prefrontal cortex during memory retrieval. These results suggest that allopregnanolone impairs memory by reducing the recruitment of those brain regions that support memory formation and retrieval. Given the important role of the amygdala in the modulation of memory, these results suggest that allopregnanolone alters memory by influencing amygdala activity, which in turn may affect memory processes in other brain regions.