Evidence from priming and lexical decision tasks suggests that nonwords created by transposing adjacent letter pairs (TL nonwords) are very effective in activating lexical representations of their base words, because the process of orthographic matching tolerates minor changes in letter position. However, this account disregards the possible role of sublexical processing in reading. TL nonwords are perceptually ambiguous, with lexical and sublexical processing giving rise to conflicting interpretations. The consequences of this ambiguity were investigated in a lexical decision experiment with primes that were either high or low bigram frequency TL versions of target words. Priming effects were much larger for low BF primes (e.g., pucnh–PUNCH) than for high BF primes (e.g., panit– PAINT). This finding is interpreted as evidence that lexical activation can be inhibited by competing output resulting from sublexical processing of TL letter string. We conclude that phonological processing is an important determinant of responses to TL stimuli, and we consider how this interpretation might be accommodated within the dual-route cascaded (DRC) model of word recognition.