Post-traumatic stress disorder (PTSD) patients respond to trauma-related danger cues even in objectively safe environments as if they were in the original event, seemingly unable to adequately modulate their responses based on the contextual cues present. In order to model this inability to utilize contextualized memory, in an animal model of PTSD, a novel experimental paradigm of contextual cue processing was developed – the differential contextual odour conditioning (DCOC) paradigm – and tested in trauma-exposed animals and controls. In the DCOC paradigm, animals encountered cinnamon odour in both an aversive environment and a rewarding (safe) environment. Response (freezing) to cinnamon odour was tested in a third, neutral environment to examine the ability of animals to modulate their responses based on the contextual cues. The effect of exposure to traumatic stressors, e.g. predator scent stress (PSS) and underwater trauma (UWT), on contextual cue discrimination was assessed. Rats trained in the DCOC paradigm acquired the ability to modulate their behavioural responses to odour cue based on contextual cues signalling safe vs. dangerous environment. The PSS and UWT stressors abolished the ability to modulate their responses based on contextual cues, both when exposure preceded DCOC training, and when it followed successfully completed training. The DCOC paradigm offers a promising model for studying the neurobiological basis of contextual modulation of response to potential threat in animals, a process that is disrupted by exposure to severe stress/trauma, and thus might be particularly salient for the study of PTSD.