The distribution of many predators may be limited by interactions with larger predator species. The arctic fox in mainland Europe is endangered, while the red fox is increasing its range in the north. It has been suggested that the southern distribution limit of the arctic fox is determined by interspecific competition with the red fox. This has been criticised, on the basis that the species co-exist on a regional scale. However, if the larger red fox is superior and interspecific competition important, the arctic fox should avoid close contact, especially during the breeding season. Consequently, the distribution of breeding dens for the two species would be segregated on a much smaller spatial and temporal scale, in areas where they are sympatric. We tested this hypothesis by analysing den use of reproducing arctic and red foxes over 9 years in Sweden. High quality dens were inhabited by reproducing arctic foxes more often when no red foxes bred in the vicinity. Furthermore, in two out of three cases when arctic foxes did reproduce near red foxes, juveniles were killed by red foxes. We also found that breeding arctic foxes occupied dens at higher altitudes than red foxes did. In a large-scale field experiment, red foxes were removed, but the results were not conclusive. However, we conclude that on the scale of individual territories, arctic foxes avoid areas with red foxes. Through interspecific interference competition, the red fox might thus be excluding the arctic fox from breeding in low altitude habitat, which is most important in years when food abundance is limited and competition is most fierce. With high altitude refuges being less suitable, even small-scale behavioural effects could scale up to significant effects at the population level.