Individuals with major depressive disorder (MDD) show impaired inhibitory control over negative thoughts. However, the brain mechanism underlying impaired inhibitory control in MDD has been incompletely described. The objective of this study was to examine brain function during inhibitory and error processing in a unique population of young, healthy, unmedicated MDD individuals. We hypothesized that MDD subjects would show clinically relevant alterations in brain activation in medial prefrontal and anterior cingulate cortex (ACC) during both inhibitory and error processing. Subjects performed an individualized parametric stop-signal task during functional magnetic resonance imaging (fMRI). MDD subjects ( n = 15) met DSM-IV criteria for current MDD. Healthy control (HC) subjects ( n = 16) had no lifetime history of MDD or other psychiatric disorder. The groups were not significantly different in several socio-demographic variables or in behavioral performance. A group by trial difficulty interaction on error-related activation in bilateral inferior frontal gyrus and left supragenual ACC was observed, suggesting a demand-specific failure of this circuitry in MDD. Additionally, a group by trial difficulty interaction on inhibition-related activation in subgenual ACC was observed. Among MDD individuals, inhibition-related subgenual activation correlated with depressive symptom severity, implicating subgenual ACC in inhibitory control processes related to clinical depression.