The classical phonological similarity effect (PSE) was studied with words and nonwords in two immediate serial recall (ISR) tasks. The relative contributions of intralist and interlist interference were compared, and differential effects on item and order memory were observed. PSE occurred with words and was reversed with nonwords. In addition, PSE was modulated by interlist similarity, which enhanced recall of rhyme items and impaired recall of distinct items. Finally, interlist similarity reduced item recall of words, whereas it improved serial recall of nonwords. The latter finding rules out the hypothesis that the reverse PSE for nonwords is due to interlist interference. It is concluded that two opposing effects of phonological intralist similarity cause the interaction between PSE and lexicality in ISR. With words, the positive effect on item recall is usually masked by a much more disruptive effect on position accuracy. With nonwords, however, the positive effect often masks the negative one. These findings are discussed in relation to current models of verbal short-term memory.