Abstract Background Impairments in executive function and language processing are characteristic of both schizophrenia and bipolar disorder. Their functional neuroanatomy demonstrate features that are shared as well as specific to each disorder. Determining the distinct pattern of neural responses in schizophrenia and bipolar disorder may provide biomarkers for their diagnoses. Methods 104 participants underwent functional magnetic resonance imaging (fMRI) scans while performing a phonological verbal fluency task. Subjects were 32 patients with schizophrenia in remission, 32 patients with bipolar disorder in an euthymic state, and 40 healthy volunteers. Neural responses to verbal fluency were examined in each group, and the diagnostic potential of the pattern of the neural responses was assessed with machine learning analysis. Results During the verbal fluency task, both patient groups showed increased activation in the anterior cingulate, left dorsolateral prefrontal cortex and right putamen as compared to healthy controls, as well as reduced deactivation of precuneus and posterior cingulate. The magnitude of activation was greatest in patients with schizophrenia, followed by patients with bipolar disorder and then healthy individuals. Additional recruitment in the right inferior frontal and right dorsolateral prefrontal cortices was observed in schizophrenia relative to both bipolar disorder and healthy subjects. The pattern of neural responses correctly identified individual patients with schizophrenia with an accuracy of 92%, and those with bipolar disorder with an accuracy of 79% in which mis-classification was typically of bipolar subjects as healthy controls. Conclusions In summary, both schizophrenia and bipolar disorder are associated with altered function in prefrontal, striatal and default mode networks, but the magnitude of this dysfunction is particularly marked in schizophrenia. The pattern of response to verbal fluency is highly diagnostic for schizophrenia and distinct from bipolar disorder. Pattern classification of functional MRI measurements of language processing is a potential diagnostic marker of schizophrenia.