Functional neurological disorder (FND) is a common and disabling condition at the intersection of neurology and psychiatry. Despite remarkable progress over recent decades, the mechanisms of FND are still poorly understood and there are limited diagnostic tools and effective treatments. One potentially promising treatment modality for FND is virtual reality (VR), which has been increasingly applied to a broad range of conditions, including neuropsychiatric disorders. FND has unique features, many of which suggest the particular relevance for, and potential efficacy of, VR in both better understanding and managing the disorder. In this review, we describe how VR might be leveraged in the treatment and diagnosis of FND (with a primary focus on motor FND and persistent perceptual-postural dizziness given their prominence in the literature), as well as the elucidation of neurocognitive mechanisms and symptom phenomenology. First, we review what has been published to date on the applications of VR in FND and related neuropsychiatric disorders. We then discuss the hypothesised mechanism(s) underlying FND, focusing on the features that are most relevant to VR applications. Finally, we discuss the potential of VR in (1) advancing mechanistic understanding, focusing specifically on sense of agency, attention and suggestibility, (2) overcoming diagnostic challenges and (3) developing novel treatment modalities. This review aims to develop a theoretical foundation and research agenda for the use of VR in FND that might be applicable or adaptable to other related disorders.