Pathogens can change the strength of intraspecific competition experienced as well as exerted by their hosts. These modifications represent indirect effects of pathogens on host life-history traits and they have been largely overlooked-in both the theoretical and experimental literature. Here we consider an eco-epidemiological model that allows for differential competition amongst and between infected and uninfected prey individuals. We find that disease-induced modifications of competition can tremendously alter the stability and persistence of predator-prey systems. Specifically, differential prey competition can facilitate the coexistence of infected prey and predators, which is impossible if competitive abilities of healthy and diseased prey are equal. We also show that this scenario can be associated with bistability, in which case the populations coexist on the brink of disease-induced extinction. These results suggest that considering parasite-modified competition can be crucial in understanding the impact infectious diseases have on their host as well as on other species their host interacts with.