Numerous studies have shown that the presence of psychosocial stress impairs the ability to retrieve episodic memories, which raise questions about the specific cognitive processes that underlie this impairment. Here, we tested the hypothesis that stress targets retrieval processes needed to reliability discriminate previously learned from new information within episodic memory, pattern separation processing by measuring the effects of retrieval-induced stress on a modified version of the Mnemonic Similarity Task. In a two-part between-subjects design, all participants studied a series of object images in an initial testing session. In a second session, held 24 hours later, half of the participants completed a stress induction task (stress group) and half performed a similarly structured but non-stressful task (control group) and all were then given a recognition memory test for the previously studied images which included new images similar to those studied (lures), and images that were completely novel (foils). Both groups performed equally well in terms of overall recognition memory, but the stress group was significantly impaired in discriminating new and similar (lure) items from studied items. This pattern of results suggests that stress specifically targets pattern separation processing when retrieving information from episodic memory. We discuss the implications of this effect, specifically how stress at retrieval reduces the ability to discriminate new from learned information.