Recent concepts have highlighted the role of the hippocampus and adjacent medial temporal lobe (MTL) in positive symptoms like delusions in schizophrenia. In healthy individuals, the MTL is critically involved in the detection and encoding of novel information. Here, we aimed to investigate whether dysfunctional novelty processing by the MTL might constitute a potential neural mechanism contributing to the pathophysiology of delusions, using functional magnetic resonance imaging (fMRI) in 16 unmedicated patients with paranoid schizophrenia and 20 age-matched healthy controls. All patients experienced positive symptoms at time of participation. Participants performed a visual target detection task with complex scene stimuli in which novel and familiar rare stimuli were presented randomly intermixed with a standard and a target picture. Presentation of novel relative to familiar images was associated with hippocampal activation in both patients and healthy controls, but only healthy controls showed a positive relationship between novelty- related hippocampal activation and recognition memory performance after 24 h. Patients, but not controls, showed a robust neural response in the orbitofrontal cortex (OFC) during presentation of novel stimuli. Functional connectivity analysis in the patients further revealed a novelty-related increase of functional connectivity of both the hippocampus and the OFC with the rostral anterior cingulate cortex (rACC) and the ventral striatum (VS). Notably, delusions correlated positively with the difference of the functional connectivity of the hippocampus vs. the OFC with the rACC. Taken together, our results suggest that alterations of fronto-limbic novelty processing may contribute to the pathophysiology of delusions in patients with acute psychosis.