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In peripheral vision, objects in clutter are difficult to identify. The exact cause of this “crowding” effect is unclear. To perceive coherent shapes in clutter, the visual system must integrate certain local features across receptive fields while preventing others from being combined. It is believed that this selective feature integration–segmentation process is impaired in peripheral vision, leading to crowding. We used functional magnetic resonance imaging (fMRI) to investigate the neural origin of crowding. We found that crowding was associated with suppressed fMRI signal as early as V1, regardless of whether attention was directed toward or away from a target stimulus. This suppression in early visual cortex was greatest for stimuli that produced the strongest crowding. In contrast, the pattern of activity was mixed in higher level visual areas, such as the lateral occipital cortex. These results support the view that the deficiency in feature integration and segmentation in peripheral vision is present at the earliest stages of cortical processing.