The habenula has been implicated in predicting negative events and in responding to unexpected negative outcomes. Animal models of depression have supported the hypothesis that perturbations in habenula activity contribute to the pathophysiology of Major Depressive Disorder (MDD), a psychiatric illness characterized by abnormalities in responding to negative feedback and by pessimism in evaluating the likelihood of future events. No research to date, however, has examined human habenula responses to potential and experienced negative outcomes in MDD. In this study, depressed and healthy control participants performed a probabilistic guessing task for monetary rewards and penalties during high-resolution functional magnetic resonance imaging of the habenula. In healthy adults, we observed a pattern of habenula activation consistent with its hypothesized role in predicting future losses and responding to suboptimal outcomes. In contrast, in depressed participants the left habenula was not activated significantly during the prediction or experience of monetary penalty. Complementing this group difference, attenuated habenula activation to negative feedback in control participants was associated with levels of shame and rumination. The results of this study suggest that depressed individuals are characterized by dysfunction in a neural system involved in generating expectations and comparing expectations with objective outcomes.