diff --git a/CHANGES.rst b/CHANGES.rst
index c353bf0c74..4465bfd5de 100644
--- a/CHANGES.rst
+++ b/CHANGES.rst
@@ -217,6 +217,11 @@ tweakreg
 - Change code default to use IRAF StarFinder instead of
   DAO StarFinder [#8487]
 
+- Added a check for ``(abs_)separation`` and ``(abs_)tolerance`` parameters
+  that ``separation`` > ``sqrt(2) * tolerance`` that will now log an error
+  message and skip ``tweakreg`` step when this condition is not satisfied and
+  source confusion is possible during catalog matching. [#8476]
+
 wfss_contam
 -----------
 
diff --git a/docs/jwst/tweakreg/README.rst b/docs/jwst/tweakreg/README.rst
index 5e707dbbb6..f24aa60f2d 100644
--- a/docs/jwst/tweakreg/README.rst
+++ b/docs/jwst/tweakreg/README.rst
@@ -307,7 +307,8 @@ The ``tweakreg`` step has the following optional arguments:
 * ``use2dhist``: A boolean indicating whether to use 2D histogram to find
   initial offset. (Default=True)
 
-* ``separation``: Minimum object separation in arcsec. (Default=1.0)
+* ``separation``: Minimum object separation in arcsec. It **must be** at least
+  ``sqrt(2)`` times larger than ``tolerance``. (Default=1.0)
 
 * ``tolerance``: Matching tolerance for ``xyxymatch`` in arcsec. (Default=0.7)
 
@@ -374,7 +375,8 @@ Parameters used for absolute astrometry to a reference catalog.
   Otherwise the initial guess for the offsets will be set to zero
   (Default=True)
 
-* ``abs_separation``: Minimum object separation in arcsec. (Default=1.0)
+* ``abs_separation``: Minimum object separation in arcsec. It **must be** at
+  least ``sqrt(2)`` times larger than ``abs_tolerance``. (Default=1.0)
 
 * ``abs_tolerance``: Matching tolerance for ``xyxymatch`` in arcsec.
   (Default=0.7)
diff --git a/jwst/regtest/test_niriss_image.py b/jwst/regtest/test_niriss_image.py
index d117b3fd10..4cce41eda6 100644
--- a/jwst/regtest/test_niriss_image.py
+++ b/jwst/regtest/test_niriss_image.py
@@ -60,9 +60,9 @@ def test_niriss_tweakreg_no_sources(rtdata, fitsdiff_default_kwargs):
         "--abs_refcat='GAIADR3'",
         "--save_results=True",
     ]
+
+    # run the test from the command line:
     result = Step.from_cmdline(args)
-    # Check that the step is skipped
-    assert result.skip
 
     # Check the status of the step is set correctly in the files.
     mc = datamodels.ModelContainer(rtdata.input)
diff --git a/jwst/tweakreg/tests/test_tweakreg.py b/jwst/tweakreg/tests/test_tweakreg.py
index c6f6e2b596..47b071c337 100644
--- a/jwst/tweakreg/tests/test_tweakreg.py
+++ b/jwst/tweakreg/tests/test_tweakreg.py
@@ -201,6 +201,25 @@ def test_tweakreg_step(example_input, with_shift):
         assert abs_delta < 1E-12
 
 
+@pytest.mark.parametrize("alignment_type", ['', 'abs_'])
+def test_src_confusion_pars(example_input, alignment_type):
+    # assign images to different groups (so they are aligned to each other)
+    example_input[0].meta.group_id = 'a'
+    example_input[1].meta.group_id = 'b'
+
+    # make the step with arguments that may cause source confusion in match
+    pars = {
+        f"{alignment_type}separation": 1.0,
+        f"{alignment_type}tolerance": 1.0,
+    }
+    step = tweakreg_step.TweakRegStep(**pars)
+    result = step(example_input)
+
+    # check that step was skipped
+    for model in result:
+        assert model.meta.cal_step.tweakreg == 'SKIPPED'
+
+
 @pytest.fixture()
 def custom_catalog_path(tmp_path):
     fn = tmp_path / "custom_catalog.ecsv"
@@ -286,7 +305,7 @@ def test_custom_catalog(custom_catalog_path, example_input, catfile, asn, meta,
             elif catfile == "invalid_catfile":
                 pass
 
-    # figure out how many sources to expect for the model in group 'a' 
+    # figure out how many sources to expect for the model in group 'a'
     n_custom_sources = N_EXAMPLE_SOURCES
     if custom:
         if catfile == "valid_catfile":
diff --git a/jwst/tweakreg/tweakreg_step.py b/jwst/tweakreg/tweakreg_step.py
index 287128bcc9..6b9fef82b7 100644
--- a/jwst/tweakreg/tweakreg_step.py
+++ b/jwst/tweakreg/tweakreg_step.py
@@ -5,6 +5,7 @@
 
 """
 from os import path
+import math
 
 from astropy import units as u
 from astropy.coordinates import SkyCoord
@@ -23,6 +24,9 @@
 from .tweakreg_catalog import make_tweakreg_catalog
 
 
+_SQRT2 = math.sqrt(2.0)
+
+
 def _oxford_or_str_join(str_list):
     nelem = len(str_list)
     if not nelem:
@@ -124,6 +128,26 @@ class TweakRegStep(Step):
     def process(self, input):
         images = ModelContainer(input)
 
+        if self.separation <= _SQRT2 * self.tolerance:
+            self.log.error(
+                "Parameter 'separation' must be larger than 'tolerance' by at "
+                "least a factor of sqrt(2) to avoid source confusion."
+            )
+            for model in images:
+                model.meta.cal_step.tweakreg = "SKIPPED"
+            self.log.warning("Skipping 'TweakRegStep' step.")
+            return input
+
+        if self.abs_separation <= _SQRT2 * self.abs_tolerance:
+            self.log.error(
+                "Parameter 'abs_separation' must be larger than 'abs_tolerance' "
+                "by at least a factor of sqrt(2) to avoid source confusion."
+            )
+            for model in images:
+                model.meta.cal_step.tweakreg = "SKIPPED"
+            self.log.warning("Skipping 'TweakRegStep' step.")
+            return input
+
         if len(images) == 0:
             raise ValueError("Input must contain at least one image model.")