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Thalamo-cortical feedback loops play a key role in the processing and coordination of processing and integration of perceptual inputs and outputs, and disruption in this connection has long been hypothesized to contribute significantly to neuropsychological disturbances in schizophrenia. To test this hypothesis, we applied diffusion tensor tractography to 18 patients suffering schizophrenia and 20 control subjects. Fractional anisotropy (FA) was evaluated in the bilateral anterior and posterior limbs of the internal capsule, and correlated with clinical and neurocognitive measures. Patients diagnosed with schizophrenia showed significantly reduced FA bilaterally in the anterior but not the posterior limb of the internal capsule, compared with healthy control subjects. Lower FA correlated with lower scores on tests of declarative episodic memory in the patient group only. These findings suggest that disruptions, bilaterally, in thalamo-cortical connections in schizophrenia may contribute to disease-related impairment in the coordination of mnemonic processes of encoding and retrieval that are vital for efficient learning of new information.