The detection of interaural time differences (ITDs) for sound localization critically depends on the similarity between the left and right ear signals (interaural correlation). We show that, like humans, owls can localize phantom sound sources well until the correlation declines to a very low value, below which their performance rapidly deteriorates. Decreasing interaural correlation also causes the response of the owl's tectal auditory neurons to decline nonlinearly, with a rapid drop followed by a more gradual reduction. A detection-theoretic analysis of the statistical properties of neuronal responses could account for the variance of behavioral responses as interaural correlation is decreased. Finally, cross-correlation analysis suggests that low interaural correlations cause misalignment of cross-correlation peaks across different frequencies, contributing heavily to the nonlinear decline in neural and ultimately behavioral performance.