In Nepal, spirit possession is a common phenomenon occurring both in individuals and in groups. To identify the cultural contexts and psychosocial correlates of spirit possession, we conducted a mixed-method study in a village in central Nepal experiencing a cluster of spirit possession events. The study was carried out in three stages: (1) a pilot study consisting of informal interviews with possessed individuals, observations of the possession spells, and video recording of possession events; (2) a case-control study comparing the prevalence of symptoms of common mental disorders in women who had and had not experienced possession; and (3) a follow-up study with focus group discussions and in-depth interviews with possessed and non-possessed men and women, and key informants. Quantitative results indicated that possessed women reported higher rates of traumatic events and higher levels of symptoms of mental disorder compared to non-possessed women (Anxiety 68 vs. 18 %, Depression 41 vs. 19 %, and PTSD 27 vs. 0 %). However, qualitative interviews with possessed individuals, family members, and traditional healers indicated that they did not associate possession states with mental illness. Spirit possession was viewed as an affliction that provided a unique mode of communication between humans and spirits. As such, it functioned as an idiom of distress that allowed individuals to express suffering related to mental illness, socio-political violence, traumatic events, and the oppression of women. The study results clearly indicate that spirit possession is a multi-dimensional phenomenon that cannot be mapped onto any single psychiatric or psychological diagnostic category or construct. Clinical and public health efforts to address spirit possession must take the socio-cultural context and systemic dynamics into account to avoid creating iatrogenic illness, undermining coping strategies, and exacerbating underlying social problems.