The generalization of fear is an adaptive, behavioral, and physiological response to the likelihood of threat in the environment. In contrast, the overgeneralization of fear, a cardinal feature of posttraumatic stress disorder (PTSD), manifests as inappropriate, uncontrollable expression of fear in neutral and safe environments. Overgeneralization of fear stems from impaired discrimination of safe from aversive environments or discernment of unlikely threats from those that are highly probable. In addition, the time-dependent erosion of episodic details of traumatic memories might contribute to their generalization. Understanding the neural mechanisms underlying the overgeneralization of fear will guide development of novel therapeutic strategies to combat PTSD. Here, we conceptualize generalization of fear in terms of resolution of interference between similar memories. We propose a role for a fundamental encoding mechanism, pattern separation, in the dentate gyrus (DG)-CA3 circuit in resolving interference between ambiguous or uncertain threats and in preserving episodic content of remote aversive memories in hippocampal-cortical networks. We invoke cellular-, circuit-, and systems-based mechanisms by which adult-born dentate granule cells (DGCs) modulate pattern separation to influence resolution of interference and maintain precision of remote aversive memories. We discuss evidence for how these mechanisms are affected by stress, a risk factor for PTSD, to increase memory interference and decrease precision. Using this scaffold we ideate strategies to curb overgeneralization of fear in PTSD.