In two experiments, 1.5-year-olds were taught novel words whose sound patterns were phonologically similar to familiar words (novel neighbors) or were not (novel nonneighbors). Learning was tested using a picture-fixation task. In both experiments, children learned the novel nonneighbors but not the novel neighbors. In addition, exposure to the novel neighbors impaired recognition performance on familiar neighbors. Finally, children did not spontaneously use phonological differences to infer that a novel word referred to a novel object. Thus, lexical competition--inhibitory interaction among words in speech comprehension--can prevent children from using their full phonological sensitivity in judging words as novel. These results suggest that word learning in young children, as in adults, relies not only on the discrimination and identification of phonetic categories, but also on evaluating the likelihood that an utterance conveys a new word.