Observation of hand movements has been repeatedly demonstrated to increase the excitability of the motor cortical representation of the hand. Little attention, however, has been devoted to its effect on somatosensory processing. Movement execution is well known to decrease somatosensory cortical excitability, a phenomenon termed 'gating'. As executed and observed actions share common cortical representations, we hypothesized that action observation (hand movements) should also modulate the cortical response to sensory stimulation of the hand. Seventeen healthy subjects participated in these experiments in which electroencephalographic (EEG) recordings of the somatosensory steady-state response (SSSR) were obtained. The SSSR provides a continuous measure of somatosensory processing. Recordings were made during a baseline condition and five observation conditions in which videos showed either a: (1) hand action; (2) passive stimulation of a hand; (3) static hand; (4) foot action; or (5) static object. The method employed consisted of applying a continuous 25 Hz vibratory stimulation to the index finger during the six conditions and measuring potential gating effects in the SSSR within the 25 Hz band (corresponding to the stimulation frequency). A significant effect of condition was found over the contralateral parietal cortex. Observation of hand actions resulted in a significant gating effect when compared to baseline (average gating of 22%). Observation of passive touch of the hand also gated the response (17% decrease). In conclusion, the results show that viewing a hand performing an action or being touched interferes with the processing of somatosensory information arising from the hand.