Structural and functional magnetic resonance imaging (fMRI) was performed on 21 healthy elderly controls, 14 subjects with mild cognitive impairment (MCI) and 15 patients with mild Alzheimer's disease (AD) to investigate changes in fMRI activation in relation to underlying structural atrophy. The fMRI paradigm consisted of associative encoding of novel picture-word pairs. Structural analysis of the brain was performed using voxel-based morphometry (VBM) and hippocampal volumetry. Compared to controls, the MCI subjects exhibited increased fMRI responses in the posterior hippocampal, parahippocampal and fusiform regions, while VBM revealed more atrophy in MCI in the anterior parts of the left hippocampus. Furthermore, the hippocampal volume and parahippocampal activation were negatively correlated in MCI, but not in controls or in AD. We suggest that the increased fMRI activation in MCI in the posterior medial temporal and closely connected fusiform regions is compensatory due to the incipient atrophy in the anterior medial temporal lobe.