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Cognitive mechanisms underlying auditory hallucinations (AH) in schizophrenia have been related to working memory (WM), although the formative mechanism is unknown. The phonological loop refers to subvocal rehearsals of information held online for supporting WM. As WM deficiency is frequent in schizophrenia, we hypothesized that AH and WM deficit share a common dysfunction in phonological loop operation, especially when it is taxed by ambiguous auditory and verbal associations. We developed an active phonological priming (APP) paradigm in which participants generated arbitrary verbal associations to pseudowords with ambiguous meaning. They were later asked to rate their familiarity to each pseudoword, a task that required subvocal evaluation of ambiguous auditory-verbal information. Factor and mediation analyses were used to test the hypothesis that WM, AH, and APP induced phonological bias toward perceiving ambiguous contents as familiar may share a common underlying mechanism. In 32 patients with schizophrenia (SZ) and 20 healthy controls (HC), SZ rated ambiguous pseudowords as significantly more familiar compared with HC (p = .006), indicating a proneness to APP-induced bias. This increased subjective bias to perceive ambiguous contents as familiar after APP significantly correlated with AH severity (p = .001) and mediated the relationship between WM and AH. Factor analysis demonstrated a common latent factor among WM, AH, and the bias induced by active priming to ambiguous contents. A heightened phonological loop priming to ambiguous contents appears to be mechanistically linked to WM deficits and AH in schizophrenia. These findings emphasize the importance of jointly addressing WM deficits and AH in clinical practice and research. (PsycINFO Database Record (c) 2019 APA, all rights reserved). [ABSTRACT FROM AUTHOR]