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Aim The N400 event‐related potential is a neurophysiological index of cognitive processing of real‐world knowledge. In healthy populations, N400 amplitude is smaller in response to stimuli that are more related to preceding context. This ‘N400 semantic priming effect’ is thought to reflect activation of contextually related information in semantic memory (SM). N400 semantic priming deficits have been found in schizophrenia, and in patients at clinical high risk (CHR) for this disorder. Because this abnormality in processing relationships between meaningful stimuli could affect ability to navigate everyday situations, we hypothesized it would be associated with real‐world functional impairment in CHR patients. Second, we hypothesized it would correlate with global neurocognitive impairment in this group. Methods We measured N400 semantic priming in 35 CHR patients who viewed prime words each followed by a related or unrelated target word, at stimulus‐onset asynchrony (SOA) of 300 or 750 ms. We measured academic/occupational and social function with the global function (GF): Role and Social scales, and cognitive function with the MATRICS Consensus Cognitive Battery (MCCB). Results Decreased N400 semantic priming at the 300‐ms SOA correlated with lower GF:Role scores. Decreased N400 semantic priming at the 750‐ms SOA correlated with lower MCCB composite scores. Conclusions Deficits in activating contextually related concepts in SM over short time intervals may contribute to functional impairment in CHR patients. Furthermore, N400 priming deficits over longer intervals may be a biomarker of global cognitive dysfunction in this population. Longitudinal studies are needed to determine whether these deficits are associated with schizophrenia risk within this population.