Sensory information is thought to be modulated by presynaptic inhibition. Although this form of inhibition is a well-studied phenomenon, it is still unclear what role it plays in shaping sensory signals in intact circuits. By visually stimulating the retinas of transgenic mice lacking GABAc receptor-mediated presynaptic inhibition, we found that this inhibition regulated the dynamic range of ganglion cell (GC) output to the brain. Presynaptic inhibition acted differentially upon two major retinal pathways; its elimination affected GC responses to increments, but not decrements, in light intensity across the visual scene. The GC dynamic response ranges were different because presynaptic inhibition limited glutamate release from ON, but not OFF, bipolar cells, which modulate the extent of glutamate spillover and activation of perisynaptic NMDA receptors at ON GCs. Our results establish a role for presynaptic inhibitory control of spillover in determining sensory output in the CNS.