At low temperatures, sufficiently small metallic and semiconductor devices exhibit the 'Coulomb blockade' effect, in which charge transport through the device occurs on an electron-by-electron basis. For example, a single electron on a metallic island can block the flow of another electron if the charging energy of the island greatly exceeds the thermal energy. The analogous effect of 'photon blockade' has been proposed for the transport of light through an optical system; this involves photon-photon interactions in a nonlinear optical cavity. Here we report observations of photon blockade for the light transmitted by an optical cavity containing one trapped atom, in the regime of strong atom-cavity coupling. Excitation of the atom-cavity system by a first photon blocks the transmission of a second photon, thereby converting an incident poissonian stream of photons into a sub-poissonian, anti-bunched stream. This is confirmed by measurements of the photon statistics of the transmitted field. Our observations of photon blockade represent an advance over traditional nonlinear optics and laser physics, into a regime with dynamical processes involving atoms and photons taken one-by-one.