Sequence disambiguation, the process by which overlapping sequences are kept separate, has been proposed to underlie a wide range of memory capacities supported by the hippocampus, including episodic memory and spatial navigation. We used functional magnetic resonance imaging (fMRI) to explore the dynamic pattern of hippocampal activation during the encoding of sequences of faces. Activation in right posterior hippocampus, only during the encoding of overlapping sequences but not nonoverlapping sequences, was found to correlate robustly with a subject-specific behavioral index of sequence learning. Moreover, our data indicate that hippocampal activation in response to elements common to both sequences in the overlapping sequence pair, may be particularly important for accurate sequence encoding and retrieval. Together, these findings support the conclusion that the human hippocampus is involved in the earliest stage of sequence disambiguation, when memory representations are in the process of being created, and provide empirical support for contemporary computational models of hippocampal function.