The current work examined neural substrates underlying interactions between two types of Gestalt grouping by recording event-related brain potentials (ERPs). Subjects were presented with stimulus arrays in which local circles and squares were grouped into columns or rows. The cues dominating grouping (proximity and similarity) were either congruent or incongruent. Subjects responded faster to the identification of orientations of perceptual groups based on proximity than similarity cues. Responses were slowed by incongruent cues and this effect was larger in the similarity than proximity conditions. Proximity grouping generated enhanced positivity over the posterior occipital cortex between 100 and 140 ms relative to similarity grouping. Relative to congruent grouping cues, incongruent cues elicited enlarged positivity over the temporal-parietal areas between 180 and 220 ms only in the similarity condition, but generated smaller P3 amplitudes with longer latencies in both proximity and similarity conditions. The results provide ERP indices of the dominance of proximity over shape similarity in guiding perceptual grouping when two grouping principles are present in stimulus displays.