Imam Ahmad (6/278) narrated it: al-Walid told us; Zakariyya told us; he said: Khalid ibn Salamah told us—through the same chain.
This contains an important point: Zakariyya explicitly stated that he heard it directly from Khalid. It has been said of him that he practised tadlis—obscuring a transmitter in the chain—in reports from al-Sha‘bi; while some, such as Abu Dawud and others, stated this without qualifying it as being limited to al-Sha‘bi. And Allah knows best.
In al-‘Ilal (1/51), it states: “I asked Abu Zur‘ah about the hadith of Khalid ibn Salamah ...” —and he mentioned it—“and he replied: ‘It is not particularly strong; this hadith is narrated only through this route.’ I then mentioned Abu Zur‘ah’s statement to Abu Hatim, and he said: ‘My view is that one may remember Allah in the privy and elsewhere on the basis of this hadith.’”
I say: The two imams, Abu Zur‘ah and Abu Hatim, differed over this hadith: the former declared it weak, whereas the latter authenticated it, as is indicated by his citing it as proof and his not agreeing with Abu Zur‘ah’s view. This is surprising on his part, for it has been mentioned in al-Bahi’s biographical entry that he said: “No proof may be based on him, for his hadith are inconsistent.”
The correct view is that the hadith is strong. No one criticized it apart from Abu Hatim; Muslim authenticated the hadith, and Ibn Sa‘d and Ibn Hibban declared al-Bahi trustworthy.
The hadith also indicates that it is permissible for one in a state of major ritual impurity to recite the Quran, because the Quran is remembrance: “And We have sent down to you the Reminder ...”; thus, it falls under the general meaning of her words, “He used to remember Allah.”
Yes, it is preferable to recite while in a state of ritual purity, because of the Prophet’s statement, peace and blessings be upon him, when he returned the greeting after performing dry ablution: “I disliked remembering Allah except while in a state of ritual purity.”
It was narrated by Abu Dawud and others, and is documented in Sahih Abi Dawud, no. (13).