Crowding is a breakdown in the ability to identify objects in clutter, and is a major constraint on object recognition. Crowding particularly impairs object perception in peripheral, amblyopic and possibly developing vision. Here we argue that crowding is also a critical factor limiting object perception in central vision of individuals with neurodegeneration of the occipital cortices. In the current study, individuals with posterior cortical atrophy (n = 26), typical Alzheimer’s disease (n = 17) and healthy control subjects (n = 14) completed centrally-presented tests of letter identification under six different flanking conditions (unflanked, and with letter, shape, number, same polarity and reverse polarity flankers) with two different target-flanker spacings (condensed, spaced). Patients with posterior cortical atrophy were significantly less accurate and slower to identify targets in the condensed than spaced condition even when the target letters were surrounded by flankers of a different category. Importantly, this spacing effect was observed for same, but not reverse, polarity flankers. The difference in accuracy between spaced and condensed stimuli was significantly associated with lower grey matter volume in the right collateral sulcus, in a region lying between the fusiform and lingual gyri. Detailed error analysis also revealed that similarity between the error response and the averaged target and flanker stimuli (but not individual target or flanker stimuli) was a significant predictor of error rate, more consistent with averaging than substitution accounts of crowding. Our findings suggest that crowding in posterior cortical atrophy can be regarded as a pre-attentive process that uses averaging to regularize the pathologically noisy representation of letter feature position in central vision. These results also help to clarify the cortical localization of feature integration components of crowding. More broadly, we suggest that posterior cortical atrophy provides a neurodegenerative disease model for exploring the basis of crowding. These data have significant implications for patients with, or who will go on to develop, dementia-related visual impairment, in whom acquired excessive crowding likely contributes to deficits in word, object, face and scene perception.