The functional-organic distinction attempts to differentiate disorders with diagnosable biological causes from those without and is a central axis on which diagnoses, medical specialities and services are organised. Previous studies report poor agreement between clinicians regarding the meanings of the terms and the conditions to which they apply, as well as noting value-laden implications of relevant diagnoses. Consequently, we aimed to understand how clinicians working in psychiatry and neurology services navigate the functional-organic distinction in their work. Twenty clinicians (10 physicians, 10 psychologists) working in psychiatry and neurology services participated in semistructured interviews that were analysed applying a constructivist grounded theory approach. The distinction was described as often incongruent with how clinicians conceptualise patients’ problems. Organic factors were considered to be objective, unambiguously identifiable and clearly causative, whereas functional causes were invisible and to be hypothesised through thinking and conversation. Contextual factors—including cultural assumptions, service demands, patient needs and colleagues’ views—were key in how the distinction was deployed in practice. The distinction was considered theoretically unsatisfactory, eventually to be superseded, but clinical decision making required it to be used strategically. These uses included helping communicate medical problems, navigating services, hiding meaning by making psychological explanations more palatable, tackling stigma, giving hope, and giving access to illness identity. Clinicians cited moral issues at both individual and societal levels as integral to the conceptual basis and deployment of the functional-organic distinction and described actively navigating these as part of their work. There was a considerable distance between the status of the functional-organic distinction as a sound theoretical concept generalisable across conditions and its role as a gatekeeping tool within the structures of healthcare. Ambiguity and contradictions were considered as both obstacles and benefits when deployed in practice and strategic considerations were important in deciding which to lean on.