In this paper, we analyze channel inversion with transmit diversity in terms of capacity and bit error rates in correlated fading. We obtain the Shannon capacity of Rayleigh fading channel under channel inversion using spatially correlated dual branch orthogonal space-time block coding, in comparison with the optimal power and rate adaptation policy, and provide a simple fixed-rate power adaptation policy to invert the Rayleigh fading into additive white Gaussian noise channel, and obtain the bit error rates using binary phase-shift keying modulation with/without channel inversion. It is found that the correlation generally causes a loss in capacity, which becomes more distinct with channel inversion relative to the optimal power and rate adaptation policy, especially when power correlation is greater than 0.5, and hinders otherwise possible full inversion. Transmit power truncation introduces power gain over full inversion, which manifests itself as an increase in capacity and a decrease in bit error probability. This gain increases with decreasing truncation level of the allowed peak transmit power. Inverting with truncation, a gain of about 19 dB in signal-to-noise ratio is obtained over classical single-antenna transmission without inversion. This gain may be further increased by a combination of truncation and correlation levels, as the correlation surprisingly turns to advantage when the normalized permitted peak-power is below 2 dB. However, the gain is normally accompanied by lower throughput or bandwidth expansion for a fixed data rate due to outage.