The exact neurophysiological basis of chronic tinnitus, which affects 10-15% of the population, remains unknown and is controversial at many levels. It is an open question whether phantom sound perception results from increased central neural gain or not, a crucial question for any future therapeutic intervention strategies for tinnitus.We performed a comprehensive study of mild hearing-impaired participants with and without tinnitus, excluding participants with co-occurrences of hyperacusis. A right-hemisphere correlation between tinnitus loudness and auditory perceptual difficulty was observed in the tinnitus group, independent of differences in hearing thresholds. This correlation was linked to reduced and delayed sound-induced suprathreshold auditory brain responses (ABR wave V) in the tinnitus group, suggesting subsided rather than exaggerated central neural responsiveness. When anatomically predefined auditory regions of interest were analysed for altered sound-evoked BOLD fMRI activity, it became evident that subcortical and cortical auditory regions and regions involved in sound detection (posterior insula, hippocampus), responded with reduced BOLD activity in the tinnitus group, emphasizing reduced, rather than increased, central neural gain. Regarding previous findings of evoked BOLD activity being linked to positive connectivities at rest, we additionally analysed r-fcMRI responses in anatomically predefined auditory regions and regions associated with sound detection. A profound reduction in positive interhemispheric connections of homologous auditory brain regions and a decline in the positive connectivities between lower auditory brainstem regions and regions involved in sound detection (hippocampus, posterior insula) were observed in the tinnitus group. The finding went hand-in-hand with the emotional (amygdala, anterior insula) and temporofrontal/stress-regulating regions (prefrontal cortex, inferior frontal gyrus) that were no longer positively connected with auditory cortex regions in the tinnitus group but were instead positively connected to lower-level auditory brainstem regions. Delayed sound processing, reduced sound-evoked BOLD fMRI activity and altered r-fcMRI in the auditory midbrain correlated in the tinnitus group and showed right hemisphere dominance as did tinnitus loudness and perceptual difficulty. The findings suggest that reduced central neural gain in the auditory stream may lead to phantom perception through a failure to energize attentional/stress-regulating networks for contextualization of auditory-specific information. Reduced auditory-specific information flow in tinnitus has until now escaped detection in humans, as low-level auditory brain regions were previously omitted from neuroimaging studies.Trial registration: German Clinical Trials Register DRKS0006332.