Exposure to an acute stressor can lead to unreliable remembrance of intrinsically neutral information, as exemplified by low reliability of eyewitness memories, which stands in contrast with enhanced memory for the stressful incident itself. Stress-sensitive neuromodulators (e.g., catecholamines) are believed to cause this low reliability by altering neurocognitive processes underlying memory formation. Using event-related functional magnetic resonance imaging, we investigated neural activity during memory formation in 44 young, healthy human participants while incidentally encoding emotionally neutral, complex scenes embedded in either a stressful or neutral context. We recorded event-related pupil dilation responses as an indirect index of phasic noradrenergic activity. Autonomic, endocrine, and psychological measures were acquired to validate stress manipulation. Acute stress during encoding led to a more liberal response bias (more hits and false alarms) when testing memory for the scenes 24h later. The strength of this bias correlated negatively with pupil dilation responses and positively with stress-induced heart rate increases at encoding. Acute stress, moreover, reduced subsequent memory effects (SMEs; items later remembered vs forgotten) in hippocampus and midbrain, and in pupil dilation responses. The diminished SMEs indicate reduced selectivity and specificity in mnemonic processing during memory formation. This is in line with a model in which stress-induced catecholaminergic hyperactivation alters phasic neuromodulatory signaling in memory-related circuits, resulting in generalized (gist-based) processing at the cost of specificity. Thus, one may speculate that loss of specificity may yield less discrete memory representations at time of encoding, thereby causing a more liberal response bias when probing these memories.