Memory formation happens in a part of the brain called the hippocampus and relies on interconnected networks of neurons transmitting information. In prolonged stress, the class of stress hormone called glucocorticoids causes hippocampal neurons to atrophy, which weakens their network and their ability to transmit information. More prolonged exposure can actually kill hippocampal neurons. Glucocorticoids also prevent the creation of new neurons. Furthermore, studies cited in Robert Sapolsky’s Why Zebras Don’t Get Ulcers indicate that repeated exposure to traumatic events causes the hippocampus to shrink, again indicating that stress and memory loss go hand in hand. Stress negatively impacts memory formation, and poor memory recall can result. There is good news, however, when it comes to how to improve memory. It turns out that the neurons in the hippocampus can regenerate and regain function if stress is reduced. You can read more about understanding stress and stress reduction for more information.
Much of the information above comes from Robert Sapolsky’s Why Zebras Don’t Get Ulcers, and you can find more information on memory impairment there. If you’re curious to read about some of the relatively recent studies on adult neurogenesis – the creation of new neurons in adults – you can read The Brain That Changes Itself by Norman Doidge.