Freshwater systems are identified as one of the main natural methane sources, but little is known about the importance of anaerobic oxidation of methane (AOM) in these systems. We investigated AOM in a lake sediment characterized by a high reactive iron content, normal sulfate concentrations in the bottom water (∼ 250 µmol L−1), and a relatively deep sulfate penetration of ∼ 14 cm, which facilitated the spatial resolution of the zones of methane production and consumption. Methane concentrations, δ13C methane profiles, and directly measured and modeled AOM rates all consistently demonstrated methane consumption throughout the anoxic, nitrate‐free, Fe(III)‐ and sulfate‐containing zone, oxidizing ∼ 90% of the diffusive methane flux. Thus, the concentration gradient of methane was steepest at the base of the Fe(III) and sulfate zone and decreased strongly toward the sediment surface; while δ13CH4 increased from < −80‰ in the methanogenic zone to −48‰ in the surface sediment. Direct measurements demonstrated AOM activity throughout the Fe(III) and sulfate zone. AOM rates peaked at sulfate concentrations below 3 µmol L−1, which suggests a possible coupling of AOM to the reduction of more crystalline Fe(III) oxides. Alternatively, AOM could be coupled to sulfate reduction, which was in turn supported by a cryptic sulfur cycle coupled to Fe(III) reduction. Our results show that AOM can substantially reduce methane emission from freshwater sediments, and the finding of AOM at sulfate concentrations < 3 µmol L−1 suggests that AOM could be of greater importance in freshwater systems, and in ancient low‐sulfate oceans, than was previously appreciated.