Deep sequencing of PCR amplicon libraries facilitates the detection of low-abundance populations in environmental DNA surveys of complex microbial communities. At the same time, deep sequencing can lead to overestimates of microbial diversity through the generation of low-frequency, error-prone reads. Even with sequencing error rates below 0.005 per nucleotide position, the common method of generating operational taxonomic units (OTUs) by multiple sequence alignment and complete-linkage clustering significantly increases the number of predicted OTUs and inflates richness estimates. We show that a 2% single-linkage preclustering methodology followed by an average-linkage clustering based on pairwise alignments more accurately predicts expected OTUs in both single and pooled template preparations of known taxonomic composition. This new clustering method can reduce the OTU richness in environmental samples by as much as 30–60% but does not reduce the fraction of OTUs in long-tailed rank abundance curves that defines the rare biosphere.