A TDMA cellular radio system and a method of allocating available frequency bands to different cells in a TDMA cellular radio system wherein at least some of the receivers within the system use interference cancellation methods which cancel the effects of co-channel interference in a desired signal. To enable efficient use of interference cancellation and the resulting capacity increase in the system, the frequency bands available for the cellular radio system are allocated to different cells so that groups of adjacent service areas are formed in the system. Each group uses the same frequency band within the service areas, whereby at least one co-channel signal interfering with the desired signal is significantly stronger than other co-channel interfering signals.