Many listening abilities become more difficult in noisy environments, particularly following hearing loss. Sound localization can be disrupted even if target sounds are clearly audible and distinct from background noise. Since subjects locate sounds by comparing the input to the two ears, sound localization is also considerably impaired by unilateral hearing loss. Currently, however, it is unclear whether the effects of unilateral hearing loss are worsened by background noise. To address this, we measured sound localization abilities in the presence or absence of broadband background noise. Adult human subjects of either sex were tested with normal hearing or with a simulated hearing loss in one ear (earplug). To isolate the role of binaural processing, we tested subjects with narrowband target sounds. Surprisingly, we found that continuous background noise improved narrowband sound localization following simulated unilateral hearing loss. By contrast, we found the opposite effect under normal hearing conditions, with background noise producing illusory shifts in sound localization. Previous attempts to model these shifts are inconsistent with behavioural and neurophysiological data. However, here we found that a simple hemispheric model of sound localization provides an explanation for our results, and provides key hypotheses for future neurophysiological studies. Overall, our results suggest that continuous background noise may be used to improve sound localization under the right circumstances. This has important implications for real-world hearing, both in normal-hearing subjects and the hearing-impaired.Significance StatementIn noisy environments, many listening abilities become more difficult, even if target sounds are clearly audible. For example, background noise can produce illusory shifts in the perceived direction of target sounds. Because sound localization relies on the two ears working together, it is also distorted by a hearing loss in one ear. We might therefore expect background noise to worsen the effects of unilateral hearing loss. Surprisingly, we found the opposite, with background noise improving sound localization when we simulated a hearing loss in one ear. A simple hemispheric model of sound localization also helped explain the negative effects of background noise under normal hearing conditions. Overall, our results highlight the potential for using background noise to improve sound localization.