Red squirrels are declining in the United Kingdom. Competition from, and squirrel poxvirus (SQPV) disease carried by, grey squirrels are assumed to be determining the decline. We analyse the incidence of disease and changes in distribution of the two species in Cumbria, from 1993 to 2003 and compare these to the predictions of an individual-based (IB) spatially explicit disease model simulating the dynamics of both squirrel species and SQPV in the landscape. Grey squirrels increased whilst red squirrels declined over 10 years. The incidence of disease in red squirrels was related to the time since grey squirrels arrived in the landscape. Analysis of rates of decline in red squirrel populations in other areas showed that declines are 17–25 times higher in regions where SQPV is present in grey squirrel populations than in those where it is not. The IB model predicted spatial overlap of 3–4 years between the species that was also observed in the field. The model predictions matched the observed data best when contact rates and rates of infection between the two species were low. The model predicted that a grey squirrel population control of >60% effective kill was needed to stop the decline in red squirrel populations in Cumbria.