The relation between pathology and cognitive dysfunction in dementia is still poorly understood, although disturbed communication between different brain regions is almost certainly involved. In this study we combine magneto-encephalography (MEG) and network analysis to investigate the role of functional sub-networks (modules) in the brain with regard to cognitive failure in Alzheimer's disease. Whole-head resting-state (MEG) was performed in 18 Alzheimer patients (age 67 ± 9, 6 females, MMSE 23 ± 5) and 18 healthy controls (age 66 ± 9, 11 females, MMSE 29 ± 1). We constructed functional brain networks based on interregional synchronization measurements, and performed graph theoretical analysis with a focus on modular organization. The overall modular strength and the number of modules changed significantly in Alzheimer patients. The parietal cortex was the most highly connected network area, but showed the strongest intramodular losses. Nonetheless, weakening of intermodular connectivity was even more outspoken, and more strongly related to cognitive impairment. The results of this study demonstrate that particularly the loss of communication between different functional brain regions reflects cognitive decline in Alzheimer's disease. These findings imply the relevance of regarding dementia as a functional network disorder.