Deficits of auditory scene analysis accompany Alzheimer's disease (AD). However, the functional neuroanatomy of spatial sound processing has not been defined in AD. We addressed this using a "sparse" fMRI virtual auditory spatial paradigm in 14 patients with typical AD in relation to 16 healthy age-matched individuals. Sound stimulus sequences discretely varied perceived spatial location and pitch of the sound source in a factorial design. AD was associated with loss of differentiated cortical profiles of auditory location and pitch processing at the prescribed threshold, and significant group differences were identified for processing auditory spatial variation in posterior cingulate cortex (controls > AD) and the interaction of pitch and spatial variation in posterior insula (AD > controls). These findings build on emerging evidence for altered brain mechanisms of auditory scene analysis and suggest complex dysfunction of network hubs governing the interface of internal milieu and external environment in AD. Auditory spatial processing may be a sensitive probe of this interface and contribute to characterization of brain network failure in AD and other neurodegenerative syndromes.