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This paper reports on investigations into the effects of spatial correlation on channel estimation and capacity of a multiple input multiple output (MIMO) system. Minimum mean square error (MMSE) method is applied for channel estimation under a correlated channel scenario. Simulation results for a 4 times 4 MIMO system with the Jakes model describing a channel between a base station and a mobile station demonstrate a trade-off between the effects of spatial correlation, channel estimation and capacity. For low values of signal to noise ratio (SNR), spatial correlation decreases channel estimation errors and improves capacity. For high values of SNR, spatial correlation has a less pronounced effect on improving channel estimation and thus the MIMO capacity is adversely affected by the decreased channel matrix rank.