Neurons in the monkey mirror neuron system (MNS) become active when actions are observed or executed. Increases in activity are greater when objects are engaged than when the actions are mimed. This modulation occurs even when object manipulation is hidden from view. We examined whether human motor systems are similarly modulated during action observation because such observation-related modulations are potentially mediated by a putative human MNS. Transcranial magnetic stimulation (TMS) was used to elicit motor-evoked potentials (MEPs) of a grasping muscle while participants observed actual or pantomimed grasping movements whose endpoints were sometimes hidden from view. MEP amplitudes were found to be modulated by object presence. Critically, the object-based modulation was found when the participant directly observed object manipulation and when the object manipulation had to be inferred because it was hidden. These findings parallel studies of MNS activity in monkeys and support the hypothesis that the MNS influences motor system activity during action observation. Although the object-based modulation of MEP amplitudes was consistent with the hypotheses, the direction of the modulation was not-MEP amplitudes decreased during action observation in contrast to the increase that has previously been observed. We suggest that the decrease in MEP amplitude on object-present trials resulted from inhibitory mechanisms that were activated to suppress the observation-evoked response codes from generating overt muscle activity.