Impairment in mental flexibility may be a key component contributing to cardinal cognitive symptoms among mood disorders patients, particularly thought control disorders. Impaired ability to switch from one thought to another might reflect difficulties in either generating new mental states, inhibiting previous states, or both. However, the neural underpinnings of impaired cognitive flexibility in mood disorders remain largely unresolved. We compared a group of mood disorders patients (n = 29) and a group of matched healthy subjects (n = 32) on a novel task-switching paradigm involving happy and sad faces, that allowed us to separate generation of a new mental set (Switch Cost) and inhibition of the previous set during switching (Inhibition Cost), using fMRI. Behavioral data showed a larger Switch Cost in patients relative to controls, but the average Inhibition Cost did not differ between groups. At the neural level, a main effect of group was found with stronger activation of the subgenual cingulate cortex in patients. The larger Switch Cost in patients was reflected by a stronger recruitment of brain regions involved in attention and executive control, including the left intraparietal sulcus, precuneus, left inferior fontal gyrus, and right anterior cingulate. Critically, activity in the subgenual cingulate cortex was not downregulated by inhibition in patients relative to controls. In conclusion, mood disorder patients have exaggerated Switch Cost relative to controls, and this deficit in cognitive flexibility is associated with increased activation of the fronto-parietal attention networks, combined with impaired modulation of the subgenual cingulate cortex when inhibition of previous mental states is needed.