Psychophysics of spatial hearing and the underlying neural mechanisms in humans nicely reviewed
Localization of sound sources is a complicated challenge for the human brain since the auditory system, unlike the visual one, lacks direct correspondence between sound source locations and sensory receptive fields. In their recent review article, Dr. Jyrki Ahveninen et al. (2013) provide a comprehensive review of what is known about the psychophysics of sound localization and the current understanding of the underlying cortical mechanisms as elucidated by neuroimaging studies.
Both animal models and more recently non-invasive neuroimaging studies in humans have suggested a special role in auditory spatial processing for cortical areas that reside posterior to the primary auditory cortex, including planum temporale and posterior superior temporal gyrus, however, both the precise underlying neural mechanisms have remained in many ways an unresolved puzzle in cognitive neuroscience. The most significant outstanding questions are laid out in the paper, which is a good read for anyone interested in the cognitive neuroscience of spatial hearing.
Reference: Ahveninen J, Kopco N, Jaaskelainen IP. Psychophysics and neuronal bases of sound localization in humans (2013) Hearing Research, e-publication ahead of print. http://dx.doi.org/10.1016/j.heares.2013.07.008