This paper studies the stochastic stabilization problem for discrete-time networked control systems with time delay and packet dropout. The message losses and time delay from the sensor to the controller and from the controller to the actuator are considered simultaneously. A two-state Markov chain is used to model the correlated packet dropout process. By introducing free weighting matrices, the sufficient condition on the stochastic stability of such networked control system is obtained. An improved criterion is found by introducing the delay fractioning method and a new Lyapunov–Krasovskii functional. On the basis of the stability condition, the mode-dependent controller is given in terms of linear matrix inequalities. A simulation example is given to show the proposed results. Copyright © 2012 John Wiley & Sons, Ltd.