Hypothalamus communication with the rest of the brain and peripheral target tissues is critically important for many physiological and psychological functions. These functions include maintaining neuroendocrine circadian rhythms and managing affective processes. The hypothalamus maintains both direct neural connections within the brain and it also controls a variety of neuroendocrine processes that can influence target tissues throughout the body. Dysregulation of the hypothalamic pituitary adrenal axis and hyperactivity of the subgenual cortex are both frequently observed in depression. However, many details of how the hypothalamus, the hypothalamic pituitary adrenal (HPA) axis, and the subgenual cingulate interact with each other are unknown. We hypothesized that resting-state functional connectivity between the hypothalamus and the subgenual cortex would be associated with altered circadian rhythm in patients with depression and depressive symptoms. We also hypothesized that this would be most apparent in patients that have major depression with psychotic symptoms, who typically have the most robust HPA-axis dysregulation. Resting-state functional magnetic resonance imaging (fMRI) scans were collected to observe low-frequency resting-state functional connectivity patterns of the hypothalamus in 39 healthy participants, 39 patients with major depression, and 22 patients with major depression with psychotic symptoms. Hourly overnight measures of cortisol secretion and multiple measures of psychiatric symptom severity were also collected on all. Strong hypothalamic functional connectivity with the subgenual cortex was observed in healthy participants. This connectivity was significantly reduced in patients with psychotic major depression. Increased cortisol secretion during the circadian nadir and reduced connectivity were both associated with symptom severity. Reduced connectivity and high cortisol secretion during the circadian nadir are both useful for explaining a significant amount of variance in symptom severity that occurs between healthy participants and depressed patients. However, only cortisol secretion was useful for explaining the severity of symptoms within the depressed groups. This study suggests that the communication between the hypothalamus and the subgenual cortex is disrupted in patients with major depression with psychotic features. It also suggests that these disruptions are associated with increased symptom severity and may be a cause or a consequence of cortisol dysregulation.