Flexibility of associative learning can be revealed by establishing and then reversing cue-outcome discriminations. Here, we used functional MRI to examine whether neurobehavioral correlates of reversal-learning are impaired in White and Asian volunteers when initial learning involves fear-conditioning to a racial out-group. For one group, the picture of a Black male was initially paired with shock (threat) and a White male was unpaired (safe). For another group, the White male was a threat and the Black male was safe. These associations reversed midway through the task. Both groups initially discriminated threat from safety, as expressed through skin conductance responses (SCR) and activity in the insula, thalamus, midbrain and striatum. After reversal, the group initially conditioned to a Black male exhibited impaired reversal of SCRs to the new threat stimulus (White male), and impaired reversals in the striatum, anterior cingulate cortex, midbrain and thalamus. In contrast, the group initially conditioned to a White male showed successful reversal of SCRs and successful reversal in these brain regions toward the new threat. These findings provide new evidence that an aversive experience with a racial out-group member impairs the ability to flexibly and appropriately adjust fear expression towards a new threat in the environment.