The brain goes through three separate stages to decide if it recognises a face, scientists claim.
A team from University College London says the first assesses a face's physical aspects.
The second decides if it is known or unknown. If it is a recognisable face, the third part puts a name to it.
The researchers say their study, published in Nature Neuroscience, could help those people with dementia who lose their ability to recognise faces.
The researchers say analysing how we respond to the stages of "morphing" a recognisable figure such as Margaret Thatcher into Marilyn Monroe gives clues as to how we process the facial features we see.
Their study found the brain tries to pin a single identity on a face, even if it looks like a mix of two people.
A face that was 60% Marilyn Monroe and 40% Margaret Thatcher will be identified as an older version of Marilyn Monroe.
But an image which is 40% Marilyn and 60% Maggie will be seen as the "sexier" side of Margaret Thatcher, say the researchers.
In the study, volunteers were then shown morphed faces and asked to identify each one.
They then used fMRI (functional Magnetic Resonance Imaging) scans to monitor brain activity.
It was found that the inferior occipital gyri at the back of the brain were found to be particularly sensitive to slight physical changes, such as wrinkles, in the faces.
The right fusiform gyrus (RFG), appeared to be involved in making a more general appraisal of the face and compares it to the brain's database of stored memories to see if it is someone familiar.
The third activated region, the anterior temporal cortex (ATC), is believed to store facts about people and is thought to be an essential part of the identifying process.
This area was more active when volunteers knew the celebrities well.
The researchers say that if even one of these steps breaks down - as can happen in some forms of dementia - people can lose their ability to identify others.
Knowing how the process works means it may be possible to intervene when the it breaks down, as in dementia.
It may also help people with prosopagnosia or 'face-blindness' - a rare condition where the brain is unable to process faces normally and people may not even be able to recognise their partner's face, or their own image in the mirror.
Pia Rotshtein of UCL's Institute of Neurology, who worked on the study, said: "Our brains have in-built mechanisms for 'reading' faces which we use all the time.
"When you go home for Christmas and your mum studies you as you walk through the door, one part of her brain will be analysing different bits of your face (are your cheeks fat, do you look well?).
"Other parts will be comparing the current image of your face to memories from the last time she saw you - the whole process leading her to declare that you have gained or lost weight."
Professor Jon Driver of UCL's Institute of Cognitive Neuroscience added: "Dementia patients with damage to the ATC can find it difficult to correctly name someone, while people with a form of epilepsy triggered by the RFG might struggle to distinguish between faces, mistakenly believing different faces to belong to the same person."
Iain Hutchison, consultant facial surgeon at Barts and the London NHS Trust, said: "Facial recognition is a very puzzling and complex process.
"So it is interesting to see these researchers' conclusions.
"But I think it is an under-estimate to suggest just three areas are involved in facial recognition."