During navigation and the search phase of foraging, mustached bats emit approximately 25 ms long echolocation pulses (at 10-40 Hz) that contain multiple harmonics of a constant frequency (CF) component followed by a short (3 ms) downward frequency modulation. In the context of auditory stream segregation, therefore, bats may either perceive a coherent pulse-echo sequence (PEPE...), or segregated pulse and echo streams (P-P-P... and E-E-E...). To identify the neural mechanisms for stream segregation in bats, we developed a simple yet realistic neural network model with seven layers and 420 nodes. Our model required recurrent and lateral inhibition to enable output nodes in the network to 'latch-on' to a single tone (corresponding to a CF component in either the pulse or echo), i.e., exhibit differential suppression by the alternating two tones presented at a high rate (> 10 Hz). To test the applicability of our model to echolocation, we obtained neurophysiological data from the primary auditory cortex of awake mustached bats. Event-related potentials reliably reproduced the latching behaviour observed at output nodes in the network. Pulse as well as nontarget (clutter) echo CFs facilitated this latching. Individual single unit responses were erratic, but when summed over several recording sites, they also exhibited reliable latching behaviour even at 40 Hz. On the basis of these findings, we propose that a neural correlate of auditory stream segregation is present within localized synaptic activity in the mustached bat's auditory cortex and this mechanism may enhance the perception of echolocation sounds in the natural environment.