Speech perception and comprehension are often challenged by the need to recognize speech sounds that are degraded or ambiguous. Here, we explore the cognitive and neural mechanisms involved in resolving ambiguity in the identity of speech sounds using syllables that contain ambiguous phonetic segments (e.g., intermediate sounds between /b/ and /g/ as in “blade” and “glade”). We used an audio-morphing procedure to create a large set of natural sounding minimal pairs that contain phonetically ambiguous onset or offset consonants (differing in place, manner, or voicing). These ambiguous segments occurred in different lexical contexts (i.e., in words or pseudowords, such as blade–glade or blem–glem) and in different phonological environments (i.e., with neighboring syllables that differed in lexical status, such as blouse–glouse). These stimuli allowed us to explore the impact of phonetic ambiguity on the speed and accuracy of lexical decision responses (Experiment 1), semantic categorization responses (Experiment 2), and the magnitude of BOLD fMRI responses during attentive comprehension (Experiment 3). For both behavioral and neural measures, observed effects of phonetic ambiguity were influenced by lexical context leading to slower responses and increased activity in the left inferior frontal gyrus for high-ambiguity syllables that distinguish pairs of words, but not for equivalent pseudowords. These findings suggest lexical involvement in the resolution of phonetic ambiguity. Implications for speech perception and the role of inferior frontal regions are discussed.