Competition drives habitat segregation between adults and juveniles in many types of organisms, but little is known about this process in anemonefish that compete for host sea anemones which differ in habitat quality. We performed field and laboratory experiments to determine causes of habitat segregation in 2-band anemonefish Amphiprion bicinctus on coral reefs in the northern Red Sea, where juvenile fish mainly occupy leathery sea anemones Heteractis crispa, and breeding adults almost exclusively inhabit bulb-tentacle sea anemones Entacmaea quadricolor. E. quadricolor were usually larger than H. crispa, and expanded more in response to fish presence. Adult fish visually concealed a larger proportion of their body surface area among the relatively thick tentacles of E. quadricolor than among the thinner tentacles of H. crispa, while juveniles were concealed equally well in both hosts. During field experiments, vacated E. quadricolor were colonized rapidly by fish, whereas H. crispa were not. In laboratory choice experiments, fish at all post-settlement life stages preferred E. quadricolor, and large individuals monopolized this host and relegated subordinates to H. crispa. We conclude that competitive exclusion drives habitat segregation among life stages of this anemonefish and that host anemone traits underlie this process. The non-preferred host H. crispa may function as a refuge for juvenile fish while they wait for space to become available in the preferred host E. quadricolor, where they are able to attain sexual maturity.