Empirical evidence suggests impaired facial emotion recognition in schizophrenia. However, the nature of this deficit is the subject of ongoing research. The current study tested the hypothesis that a generalized deficit at an early stage of face-specific processing (i.e. putatively subserved by the fusiform gyrus) accounts for impaired facial emotion recognition in schizophrenia as opposed to the Negative Emotion-specific Deficit Model, which suggests impaired facial information processing at subsequent stages. Event-related potentials (ERPs) were recorded from 11 schizophrenia patients and 15 matched controls while performing a gender discrimination and a facial emotion recognition task. Significant reduction of the face-specific vertex positive potential (VPP) at a peak latency of 165 ms was confirmed in schizophrenia subjects whereas their early visual processing, as indexed by P1, was found to be intact. Attenuated VPP was found to correlate with subsequent P3 amplitude reduction and to predict accuracy when performing a facial emotion discrimination task. A subset of ten schizophrenia patients and ten matched healthy control subjects also performed similar tasks in the magnetic resonance imaging scanner. Patients showed reduced blood oxygenation level-dependent (BOLD) activation in the fusiform, inferior frontal, middle temporal and middle occipital gyrus as well as in the amygdala. Correlation analyses revealed that VPP and the subsequent P3a ERP components predict fusiform gyrus BOLD activation. These results suggest that problems in facial affect recognition in schizophrenia may represent flow-on effects of a generalized deficit in early visual processing.