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Stress exacerbates mental illnesses such as depression but also appears to increase risk of dementia, suggesting a common mechanism for development of stress-induced affective and cognitive impairment. The purpose of this review is to address the question of whether anxiety ‘damages’ the brain, and to identify potential mechanisms for the link between stress and neuropsychiatric illness.Anxiety disorders are associated with alterations in fear neurocircuitry such that ‘bottom-up’ processes in the amygdala which respond to threat are exaggerated, and regulation of these processes by the prefrontal cortex (PFC) and hippocampus is impaired. Chronic stress exposure similarly alters fear neurocircuitry by enhancing amygdalar functioning while causing structural degeneration in the PFC and hippocampus thereby inhibiting PFC/hippocampus control over the stress response. Pharmacological (e.g., antidepressant medications) and nonpharmacological interventions (cognitive-behavioral therapy, exercise) may reverse stress-induced damage in the brain.Pathological anxiety and chronic stress lead to structural degeneration and impaired functioning of the hippocampus and the PFC, which may account for the increased risk of developing neuropsychiatric disorders, including depression and dementia. Longitudinal studies are needed to determine whether reversal of stress-induced brain changes by interventions such as cognitive-behavioral therapy can reduce risk of neuropsychiatric illness.