What is the likely diagnosis? What is the differential diagnosis?
This most likely represents a suprasellar arachnoid cyst. The differential at first glance is of obstructive hydrocephalus with marked distention of the third ventricle.
How can you distinguish between these two entities?
The key is identifying the floor of the third ventricle. If it is pushed up (as is the case here) then it represents an arachnoid cyst. If it is pushed down then it represents dilatation of the third ventricle (hydrocephalus or rarely an intraventricular cyst).
Have a careful look and see if you can identify the following structures: anterior cerebral arteries and basilar artery tip; optic chiasm; pituitary infundibulum; septum pellucidum.
These are most easily seen on T2 weighted images. See annotated images below.
MRI demonstrates a CSF intensity space distorting the optic chiasm and pituitary infundibulum (pushing them forwards and upwards). A thin membrane can be seen (best on sagittal and axial T2 weighted images) invaginating upwards into the third ventricle, splaying the septum pellucidum and even bulging into the left foramen of Munro. The lateral ventricles are dilated, in keeping with obstructive hydrocephalus, clearly long standing (note large size and lack of transependymal oedema).