The degree of data-based and expected coherence within groups was predicted to enhance intergroup differentiation in the illusory correlation paradigm. Results of Study 1 indicated that data-based coherence was a prerequisite for illusory correlation, and this effect was further enhanced by expected coherence. Reinterpretations of the behaviors also augmented illusory correlation, especially when instructions provided greater scope for this, but only under conditions of data-based coherence. The finding that group coherence enhances illusory correlation contradicts recent findings of A. R. McConnell, S. J. Sherman, and D. L. Hamilton (1997). This anomaly was resolved by showing that the relation between group coherence and illusory correlation is curvilinear (Study 2). Illusory correlation increased with coherence but diminished when group coherence was sufficiently high to undermine meaningful evaluative differentiation between groups. Results showed that intragroup similarity is both a precursor and a product of differentiation and illusory correlation.