Visual perception of a stimulus is a function of the visual context in which it is displayed. Surround suppression is a specific form of contextual modulation whereby the perceived contrast of a center stimulus is decreased by a high-contrast surround. Recent studies have demonstrated that individuals with schizophrenia are less prone to visual contextual effects, suggesting impairments in cortical lateral connectivity. We tested whether altered contextual modulation in schizophrenia is stimulus orientation selective. Participants viewed an annulus consisting of contrast-reversing sinusoidal gratings and determined if any one segment of the annulus had lower contrast relative to the other segments. Three stimulus configurations were tested: no surround (NS), parallel surround (PS), and orthogonal surround (OS). In the PS condition, the annulus was embedded in a 100% contrast grating parallel to the annulus gratings. In the OS condition, the surround grating was rotated 90 degrees relative to the orientation of the annulus gratings. The main dependent measure was the suppression index-the change in contrast threshold in the OS and PS conditions relative to the NS condition. There was a group x condition interaction such that patients had significantly lower PS suppression index than controls, but there were no group differences in the OS suppression index. We conclude that individuals with schizophrenia possess an abnormality in surround suppression that is specific for stimulus orientation. In conjunction with physiological and anatomical evidence from basic and postmortem studies, our results suggest a deficit of inhibition in primary visual cortex in schizophrenia.