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Description: Familiarity with a word-form has been identified as one source of information infants use in detecting and segmenting individual words from continuous speech (Altvater-Mackensen & Mani, 2013). Here we extend this finding to examine whether prior familiarity with the phonological form and meaning of a word (based on natural language exposure) influences segmentation of words from fluent speech. The current study tested infants’ segmentation of pseudo-words that sound similar to words infants were likely to already be familiar with, given their natural exposure to language at home. A word-comprehension task confirmed that infants were not only familiar with the chosen word-forms but also their meaning. Results of the segmentation task suggest that infants are able to use their knowledge of previously familiar words to segment similar-sounding words from the speech stream. Thus, word-form similarity based segmentation is a powerful mechanism that can drive infants’ rapid vocabulary growth. In addition, the study confirms that 7-month-old infants already comprehend simple frequent words and are able to distinguish them from subtle mispronunciations of these words.