Since the introduction of the term ecosystem engineering by Jones et al. many studies have focused on positive, facilitative interactions caused by ecosystem engineering. Much less emphasis has been placed on the role of ecosystem engineering in causing negative interactions between species. Here, we report on negative interactions between two well known ecosystem engineers occurring at the interface of salt marsh and intertidal flat (i.e. common cordgrass Spartina anglica and lugworms Arenicola marina), via modification of their joint habitat. A field survey indicated that, although both species share a common habitat, they rarely co-occur on small spatial scales (<1 m). Experiments in the field and in mesocosms reveal that establishment of small Spartina plants is inhibited in Arenicola-dominated patches because of low sediment stability induced by the lugworms. In turn, Arenicola establishment in Spartina-dominated patches is limited by high silt content, compactness and dense rooting of the sediment caused by Spartina presence. Our results show that negative interactions by modification of the environment can result in rapid mutual exclusion, particularly if adverse effects of habitat modification are strong and if both species exhibit positive feedbacks. This illustrates the potential for negative interactions via the environment to affect community composition.