Emotional experiences can strengthen memories so that they can be used to guide future behavior. Emotional arousal, mediated by the amygdala, is thought to modulate storage by the hippocampus, which may encode unique episodic memories via pattern separation – the process by which similar memories are stored using non-overlapping representations. While prior work has examined mnemonic interference due to similarity and emotional modulation of memory independently, examining the mechanisms by which emotion influences mnemonic interference has not been previously accomplished in humans. To this end, we developed an emotional memory task where emotional content and stimulus similarity were varied to examine the effect of emotion on fine mnemonic discrimination (a putative behavioral correlate of hippocampal pattern separation). When tested immediately after encoding, discrimination was reduced for similar emotional items compared to similar neutral items, consistent with a reduced bias towards pattern separation. After 24 hours, recognition of emotional target items was preserved compared to neutral items, whereas similar emotional item discrimination was further diminished. This suggests a potential mechanism for the emotional modulation of memory with a selective remembering of gist, as well as a selective forgetting of detail, indicating an emotion-induced reduction in pattern separation. This can potentially increase the effective signal-to-noise ratio in any given situation to promote survival. Furthermore, we found that individuals with depressive symptoms hyper-discriminate negative items, which correlated with their symptom severity. This suggests that utilizing mnemonic discrimination paradigms allows us to tease apart the nuances of disorders with aberrant emotional mnemonic processing.