Abstract After watching sports, people often feel as if their sports skills might have been improved, even without any actual training. On some occasions, this motor skill learning through observation actually occurs. This phenomenon may be due to the fact that both action and action observation ( AO ) can activate shared cortical areas. However, the neural basis of performance gain through AO has not yet been fully clarified. In the present study, we used transcranial magnetic stimulation to investigate whether primary motor cortex (M1) plasticity is a physiological substrate of AO ‐induced performance gain and whether AO itself is sufficient to change motor performance. The excitability of M1, especially that of its intracortical excitatory circuit, was enhanced after and during AO with kinesthetic illusion but not in interventions without this illusion. Moreover, behavioral improvement occurred only after AO with kinesthetic illusion, and a significant correlation existed between the performance gain and the degree of illusion. Our findings indicated that kinesthetic illusion is an essential component of the motor learning and M1 plasticity induced by AO , and this insight may be useful for the strategic rehabilitation of stroke patients.