Distracting emotional information impairs attention more in schizophrenia (SCZ) than in never-psychotic individuals. However, it is unclear whether this impairment and its neural circuitry is indicative generally of psychosis, or specifically of SCZ, and whether it is even more specific to certain SCZ symptoms (eg, deficit syndrome). It is also unclear if this abnormality contributes to impaired behavioral performance and real-world functioning. Functional imaging data were recorded while individuals with SCZ, bipolar disorder with psychosis (BDP) and no history of psychotic disorders (CON) attended to identity of faces while ignoring their emotional expressions. We examined group differences in functional connectivity between amygdala, involved in emotional evaluation, and sub-regions of medial prefrontal cortex (MPFC), involved in emotion regulation and cognitive control. Additionally, we examined correlation of this connectivity with deficit syndrome and real-world functioning. Behaviorally, SCZ showed the worst accuracy when matching the identity of emotional vs neutral faces. Neurally, SCZ showed lower amygdala-MPFC connectivity than BDP and CON. BPD did not differ from CON, neurally or behaviorally. In patients, reduced amygdala-MPFC connectivity during emotional distractors was related to worse emotional vs neutral accuracy, greater deficit syndrome severity, and unemployment. Thus, reduced amygdala-MPFC functional connectivity during emotional distractors reflects a deficit that is specific to SCZ. This reduction in connectivity is associated with worse clinical and real-world functioning. Overall, these findings provide support for the specificity and clinical utility of amygdala-MPFC functional connectivity as a potential neural marker of SCZ.