Large-scale changes in luminance are known to exert a significant suppressive or masking effect on visual perception, but the neural substrate for this effect remains unclear. In this report, we describe the results of experiments using in vivo intracellular recording to explore the impact of luminance transients on the responses of orientation-selective neurons in layer 2/3 of tree shrew primary visual cortex. By measuring changes in excitatory and inhibitory conductances, we find that instantaneous changes in luminance evoke strong cortical inhibition. When combined with visual stimuli that would otherwise yield strong excitatory responses, luminance transients produce significant reductions in excitation as well as increases in inhibition. As a result, luminance transients significantly delay the emergence of orientation tuned cortical responses, and virtually eliminate ongoing responses to effective stimuli. We conclude that cortical inhibition is a critical factor in luminance-evoked cortical suppression and the likely substrate for luminance-induced visual masking phenomenon.