Three experiments investigated the role of distal (i.e., nonlocal) prosody in word segmentation and lexical processing. In Experiment 1, prosodic characteristics of the initial five syllables of eight-syllable sequences were manipulated; the final portions of these sequences were lexically ambiguous (e.g., "note bookworm", "notebook worm"). Distal prosodic context affected the rate with which participants heard disyllabic final words, although identical acoustic material was judged. In Experiment 2, removing four syllables of initial context reduced the magnitude of the distal prosodic effect. Experiment 3 used a study-test recognition design; better recognition was demonstrated for visually-presented disyllabic words when these items were comprised of adjacent syllables previously heard in distal prosodic contexts predicted to facilitate perceptual grouping of these two syllables. Overall, this research identifies distal prosody as a new factor in word segmentation and lexical processing and provides support for a perceptual grouping hypothesis derived from principles of auditory perceptual organization. (Contains 4 figures.)