Cognitive radio is a promising paradigm for efficient utilization of the radio spectrum due to its capability to sense environmental conditions and adapt its communication and localization features. In this paper, the theoretical limits on time-of-arrival estimation for cognitive radio localization systems are derived in the presence of interference. In addition, an optimal spectrum allocation strategy which provides the best ranging accuracy limits is proposed. The strategy accounts for the constraints from the sensed interference level as well as from the regulatory emission mask. Numerical results are presented to illustrate the improvements that can be achieved by the proposed approach. © 2009 IEEE.