Score-based diffusion models have achieved incredible performance in generating realistic images, audio, and video data. While these models produce high-quality samples with impressive details, they often introduce unrealistic artifacts, such as distorted fingers or hallucinated texts with no meaning. This paper focuses on textual hallucinations, where diffusion models correctly generate individual symbols but assemble them in a nonsensical manner. Through experimental probing, we consistently observe that such phenomenon is attributed it to the network's local generation bias. Denoising networks tend to produce outputs that rely heavily on highly correlated local regions, particularly when different dimensions of the data distribution are nearly pairwise independent. This behavior leads to a generation process that decomposes the global distribution into separate, independent distributions for each symbol, ultimately failing to capture the global structure, including underlying grammar. Intriguingly, this bias persists across various denoising network architectures including MLP and transformers which have the structure to model global dependency. These findings also provide insights into understanding other types of hallucinations, extending beyond text, as a result of implicit biases in the denoising models. Additionally, we theoretically analyze the training dynamics for a specific case involving a two-layer MLP learning parity points on a hypercube, offering an explanation of its underlying mechanism.