Somatostatin (SST) is a neuropeptide expressed in a major subtype of GABAergic interneurons in the cortex. Despite abundant expression of SST and its receptors, their modulatory function in cortical processing remains unclear. Here, we found that SST application in the primary visual cortex (V1) improves visual discrimination in freely moving mice and enhances orientation selectivity of V1 neurons. We also found that SST reduced excitatory synaptic transmission to parvalbumin-positive (PV+) fast-spiking interneurons but not to regular-spiking neurons. Last, using serial block-face scanning electron microscopy (SBEM), we found that axons of SST+ neurons in V1 often contact other axons that exhibit excitatory synapses onto the soma and proximal dendrites of the PV+ neuron. Collectively, our results demonstrate that the neuropeptide SST improves visual perception by enhancing visual gain of V1 neurons via a reduction in excitatory synaptic transmission to PV+ inhibitory neurons.