Spatial contrast, the difference in adjacent luminance values, provides information about objects, textures, and motion and supports diverse visual behaviors. Contrast computation is therefore an essential element of visual processing. The underlying mechanisms, however, are poorly understood. In human psychophysics, contrast illusions are means to explore such computations, but humans offer limited experimental access. Via behavioral experiments in Drosophila, we find that flies are also susceptible to contrast illusions. Using genetic silencing techniques, electrophysiology, and modeling, we systematically dissect the mechanisms and neuronal correlates underlying the behavior. Our results indicate that spatial contrast computation involves lateral inhibition within the same pathway that computes motion of luminance increments (ON pathway). Yet motion-blind flies, in which we silenced downstream motion-sensitive neurons needed for optomotor behavior, have fully intact contrast responses. In conclusion, spatial contrast and motion cues are first computed by overlapping neuronal circuits which subsequently feed into parallel visual processing streams.