What mental disorder comprises of the inability to tell the difference between reality and one's imagination?

Most disorders that have to do with a blurred line between reality and false truths have to do with hallucinations, which is most commonly schizophrenia. Many subtypes of schizophrenia also consist of an inability to register what is reality and what is not. For example, paranoid schizophrenics often believe that there is a conspiracy theory or the like involving them (ie: Aliens involve the subject in a plot to dominate Mars). There are other mental disorders that have this as a symptom, and it can be argued that all mental disorders in some part consist of a blurred sense of reality, however schizophrenia is probably the answer you're looking for.