Abstract After reviewing recent empirical studies of short-term climate predictability based on observations of the sea surface temperature (SST), the physical processes that govern the generation and decay of large scale SST anomalies are discussed. Using a slab model of the oceanic mixed layer, we find that large scale mid-latitude SST anomalies can be described as a first-order autoregressive process in regions of small mean current, as suggested by Frankignoul and Hasselmann (1977). The SST anomalies are continuously generated by the natural variability of the air-sea fluxes. Short time scale variations in the local heat exchanges seem dominant, although mixed-layer depth variations are important during certain seasons. Temperature advection plays a large role in some regions, and mesoscale eddies mainly contribute a small scale noise. The decay of the SST anomalies can be represented by a linear negative feedback, and seems largely controlled by their back-interaction on the atmosphere. The importance of the feedback processes for climate predictability is stressed, as well as the seasonal variabilities in the SST anomaly dynamics.