Background: Persistent Postural-Perceptual Dizziness (PPPD) is a prevalent long-term functional neurological disorder characterised by non-spinning vertigo, perceived instability, and visual motion sensitivity. Current diagnostic criteria inadequately incorporate psychological variables widely associated with PPPD symptom onset and maintenance. Objectives: This study explored PPPD-specific psychological variables to differentiate PPPD patients from healthy controls and, exploratorily, from Bilateral Vestibulopathy (BVP) patients. We evaluated these variables as potential treatment targets through mediation analysis. Our aim was to inform more precise diagnostic criteria and guide targeted interventions for PPPD. Methods: We conducted a cross-sectional study with 164 participants, including 59 diagnosed cases of PPPD, 16 cases of BVP, and 89 healthy controls. Participants completed a series of questionnaires assessing negative illness perception, balance vigilance, anxiety, visual sensitivity, dizziness and other related metrics. Results: Psychological variables, particularly anxiety, cognitive fusion, and justice appraisal significantly mediated the relationship between key PPPD symptoms (dizziness, visual sensitivity, and balance vigilance) and PPPD diagnosis compared to healthy controls. Logistic regression suggested psychological differences between PPPD and BVP, but limited BVP sample size constrained generalisability. Between PPPD and healthy controls, psychological variables significantly improved classification accuracy compared to measures of dizziness alone. Conclusion: Incorporating psychological variables in the diagnosis and management of PPPD could enhance the understanding of the disorder and may aid in developing better-targeted interventions. The study supports revising existing diagnostic criteria to include validated psychological assessments and highlights the potential of treatments addressing cognitive and emotional aspects of PPPD to improve patient outcomes.