The role of contextual expectation in processing familiar and novel stimuli was investigated in a series of experiments combining eye tracking, functional magnetic resonance imaging, and behavioral methods. An experimental paradigm emphasizing either familiarity or novelty detection at retrieval was used. The detection of unexpected familiar and novel stimuli, which were characterized by lower probability, engaged activity in midbrain and striatal structures. Specifically, detecting unexpected novel stimuli, relative to expected novel stimuli, produced greater activity in the substantia nigra/ventral tegmental area (SN/VTA), whereas the detection of unexpected familiar, relative to expected, familiar stimuli, elicited activity in the striatum/globus pallidus (GP). An effective connectivity analysis showed greater functional coupling between these two seed areas (GP and SN/VTA) and the hippocampus, for unexpected than for expected stimuli. Within this network of midbrain/striatal–hippocampal interactions two pathways are apparent; the direct SN–hippocampal pathway sensitive to unexpected novelty and the perirhinal–GP–hippocampal pathway sensitive to unexpected familiarity. In addition, increased eye fixations and pupil dilations also accompanied the detection of unexpected relative to expected familiar and novel stimuli, reflecting autonomic activity triggered by the functioning of these two pathways. Finally, subsequent memory for unexpected, relative to expected, familiar, and novel stimuli was characterized by enhanced recollection, but not familiarity, accuracy. Taken together, these findings suggest that a hippocampal–midbrain network, characterized by two distinct pathways, mediates encoding facilitation and most critically, that this facilitation is driven by contextual novelty, rather than by the absolute novelty of a stimulus. This contextually sensitive neural mechanism appears to elicit increased exploratory behavior, leading subsequently to greater recollection of the unexpected stimulus. © 2015 The Authors Hippocampus Published by Wiley Periodicals, Inc.