This biogeochemical, molecular genetic and lipid biomarker study of sediments (∼4 m cores) from the Skagerrak (Denmark) investigated methane cycling in a sediment with a clear sulfate‐methane‐transition zone (SMTZ) and where CH₄ supply was by diffusion, rather than by advection, as in more commonly studied seep sites. Sulfate reduction removed sulfate by 0.7 m and CH₄ accumulated below. ¹⁴C‐radiotracer measurements demonstrated active H₂/CO₂ and acetate methanogenesis and anaerobic oxidation of CH₄ (AOM). Maximum AOM rates occurred near the SMTZ (∼3 nmol cm⁻³ day⁻¹ at 0.75 m) but also continued deeper, overall, at much lower rates. Maximum rates of H₂/CO₂ and acetate methanogenesis occurred below the SMTZ but H₂/CO₂ methanogenesis rates were × 10 those of acetate methanogenesis, and this was consistent with initial values of ¹³C‐depleted CH₄ (δ¹³C c.−80‰). Areal AOM and methanogenic rates were similar (∼1.7 mmol m⁻² day⁻¹), hence, CH₄ flux is finely balanced. A 16S rRNA gene library from 1.39 m combined with methanogen (T‐RFLP), bacterial (16S rRNA DGGE) and lipid biomarker depth profiles showed the presence of populations similar to some seep sites: ANME‐2a (dominant), ANME‐3, Methanomicrobiales, Methanosaeta Archaea, with abundance changes with depth corresponding to changes in activities and sulfate‐reducing bacteria (SRB). Below the SMTZ to ∼1.7 m CH₄ became progressively more ¹³C depleted (δ¹³C −82‰) indicating a zone of CH₄ recycling which was consistent with the presence of ¹³C‐depleted archaeol (δ¹³C −55‰). Pore water acetate concentrations decreased in this zone (to ∼5 μM), suggesting that H₂, not acetate, was an important CH₄ cycling intermediate. The potential biomarkers for AOM‐associated SRB, non‐isoprenoidal ether lipids, increased below the SMTZ but this distribution reflected 16S rRNA gene sequences for JS1 and OP8 bacteria rather than those of SRB. At this site peak rates of methane production and consumption are spatially separated and seem to be conducted by different archaeal groups. Also AOM is predominantly coupled to sulfate reduction, unlike recent reports from some seep and gassy sediment sites.