The complement system is implicated in synapse loss in the MS hippocampus, but the functional consequences of synapse loss remain poorly understood. Here, in post-mortem MS hippocampi with demyelination we find that deposits of the complement component C1q are enriched in the CA2 subfield, are linked to loss of inhibitory synapses and are significantly higher in MS patients with cognitive impairments compared to those with preserved cognitive functions. Using the cuprizone mouse model of demyelination, we corroborated that C1q deposits are highest within the demyelinated dorsal hippocampal CA2 pyramidal layer and co-localized with inhibitory synapses engulfed by microglia/macrophages. In agreement with the loss of inhibitory perisomatic synapses, we found that Schaffer collateral feedforward inhibition but not excitation was impaired in CA2 pyramidal neurons and accompanied by intrinsic changes and a reduced spike output. Finally, consistent with excitability deficits, we show that cuprizone-treated mice exhibit impaired encoding of social memories. Together, our findings identify CA2 as a critical circuit in demyelinated intrahippocampal lesions and memory dysfunctions in MS.