Optical illusions provide powerful tools for mapping the algorithms and circuits that underlie visual processing, revealing structure through atypical function. Of particular note in the study of motion detection has been the reverse-phi illusion. When contrast reversals accompany discrete movement, detected direction tends to invert. This occurs across a wide range of organisms, spanning humans and invertebrates. Here, we map an algorithmic account of the phenomenon onto neural circuitry in the fruit fly Drosophila melanogaster. Through targeted silencing experiments in tethered walking flies as well as electrophysiology and calcium imaging, we demonstrate that ON- or OFF-selective local motion detector cells T4 and T5 are sensitive to certain interactions between ON and OFF. A biologically plausible detector model accounts for subtle features of this particular form of illusory motion reversal, like the re-inversion of turning responses occurring at extreme stimulus velocities. In light of comparable circuit architecture in the mammalian retina, we suggest that similar mechanisms may apply even to human psychophysics.