Neurons in the central nucleus of the inferior colliculus (ICC) of decerebrate cats show three major response patterns when tones of different frequencies and sound-pressure levels (SPLs) are presented to the contralateral ear. The frequency response maps of type I units are uniquely defined by a narrow excitatory area at best frequency (BF: a unit's most sensitive frequency) and surrounding inhibition at higher and lower frequencies. As a result of this receptive field organization, type I units exhibit strong excitatory responses to BF tones but respond only weakly to broadband noise (BBN). These response characteristics predict that type I units are well suited to encode narrowband signals in the presence of background noise. To test this hypothesis, the dynamic range properties of ICC unit types were measured under quiet conditions and in multiple levels of continuous noise. As observed in previous studies of the auditory nerve and cochlear nucleus, type I units showed upward threshold shifts and discharge rate compression in background noise that partially degraded the dynamic range properties of neural representations at high noise levels. Although the other two unit types in the ICC showed similar trends in threshold shift and noise compression, their ability to encode auditory signals was compromised more severely in increasing noise levels. When binaural masking effects were simulated, only type I units showed an enhanced representation of spatially separated signals and maskers that was consistent with human perceptual performance in independent psychoacoustic observations. These results support the interpretation that type I units play an important role in the auditory processing of narrowband signals in background noise and suggest a physiological basis for spatial factors that govern signal detection under free-field listening conditions.