Spatial perception is an important part of a listener's experience and ability to function in everyday environments. However, the current understanding of how well listeners can locate sounds is based on measurements made using relatively simple stimuli and tasks. Here the authors investigated sound localization in a complex and realistic environment for listeners with normal and impaired hearing. A reverberant room containing a background of multiple talkers was simulated and presented to listeners in a loudspeaker-based virtual sound environment. The target was a short speech stimulus presented at various azimuths and distances relative to the listener. To ensure that the target stimulus was detectable to the listeners with hearing loss, masked thresholds were first measured on an individual basis and used to set the target level. Despite this compensation, listeners with hearing loss were less accurate at locating the target, showing increased front-back confusion rates and higher root-mean-square errors. Poorer localization was associated with poorer masked thresholds and with more severe low-frequency hearing loss. Localization accuracy in the multitalker background was lower than in quiet and also declined for more distant targets. However, individual accuracy in noise and quiet was strongly correlated.