In this study we tested whether depression is associated with impaired semantic inhibition, resulting in symptoms of rumination and anhedonia. For this purpose and using the Beck Depression Inventory II (BDI-II) college students with depressive states (DEP) and matched controls (CTL) performed a Hayling’s task, while EEG and pupillometry measures were recorded. Participants were asked to complete sentential contexts with either a highly associated word (initiation) or a non-related word (inhibition), in response to randomly presented trial-by-trial cues. The DEP group, compared to the CTL group, showed lower performance, and reduced frontal negativity (N450) in inhibition trials. Source analyses revealed greater activation for inhibition trials than for initiation trials in bilateral orbitofrontal cortex for the CTL group, but the difference was reduced and more left lateralized for the DEP group. In addition, the DEP group showed more pupil size reactivity to inhibition trials than the CTL group, indicating higher cognitive effort during semantic inhibition. Finally, self-reported rumination and anhedonia correlated with N450 in inhibition trials, and rumination correlated with pupil dilation. Overall, this research contributes to understanding the neural underpinnings of impaired semantic inhibition in individuals with depression, with potential clinical applications.