THE theory of biased galaxy formation with cold dark matter (CDM) is presently the most successful attempt to reproduce the distribution of galaxies in the Universe1–6, permitting a reconciliation of the observed low value of the cosmological density parameter ω0 ≤ 0.2 with the value of unity predicted by inflation. Specific tests of the bias hypothesis, namely that galaxies are more clustered than the mass1,2,4, however, have not yet led to definitive conclusions. Here we show that a systematic luminosity segregation effect in the clustering of galaxies is expected and provides an unambiguous test of the biased galaxy formation theory. We examine in detail how the clustering of galaxies correlates with their luminosity, using different biased models and numerical simulations5–7. We find that a strong effect is expected at luminosities larger than L* the characteristic luminosity of galaxies and that the amplitude of the predicted effect at these luminosities agrees with observations8. At luminosities fainter than L* however, strong limits have been put on this segregation effect9. These limits are incompatible with any biased CDM theory in which the bias parameter bb for bright galaxies is greater than 1.5 on large scales.