This study developed and tested a real-time processing algorithm designed to degrade sound localization (LocDeg algorithm) without affecting binaural benefits for speech reception in noise. Input signals were divided into eight frequency channels. The odd-numbered channels were mixed between the ears to confuse the direction of interaural cues while preserving interaural cues in the even-numbered channels. The LocDeg algorithm was evaluated for normal-hearing listeners performing sound localization and speech-reception tasks. Results showed that the LocDeg algorithm successfully degraded sound-localization performance without affecting speech-reception performance or spatial release from masking for speech in noise. The LocDeg algorithm did, however, degrade speech-reception performance in a task involving spatially separated talkers in a multi-talker environment, which is thought to depend on differences in perceived spatial location of concurrent talkers. This LocDeg algorithm could be a valuable tool for isolating the importance of sound-localization ability from other binaural benefits in real-world environments.