Step 1: Break the word down. "Prosopon" means face and "agnosia" means lack of knowing, so prosopagnosia literally means an inability to know or recognise faces.
Step 2: Clinically the patient sees the face perfectly well but cannot match it to a person they know, because the face-processing region in the fusiform gyrus of the temporo-occipital cortex is damaged. This points straight to difficulty identifying known faces.
Step 3: Match each wrong choice to its real name. Reduced awareness or alertness is an impairment of consciousness. Denial of one's own illness is anosognosia. Not recognising objects in general is object agnosia.
Step 4: Therefore the only definition that fits the term is the one describing failure to recognise familiar faces.
\[\boxed{\text{Difficulty in identifying known faces}}\]