Neurophysiological studies suggest that abnormal neural inhibition may explain a range of sensory processing differences in autism spectrum disorders (ASD). In particular, the impaired ability of people with ASD to visually discriminate the motion direction of small-size objects and their reduced perceptual suppression of background-like visual motion may stem from deficient surround inhibition within the primary visual cortex (V1) and/or its atypical top-down modulation by higher-tier cortical areas. In this study, we estimate the contribution of abnormal surround inhibition to the motion-processing deficit in ASD. For this purpose, we used a putative correlate of surround inhibition-suppression of the magnetoencephalographic (MEG) gamma response (GR) caused by an increase in the drift rate of a large annular high-contrast grating. The motion direction discrimination thresholds for the gratings of different angular sizes (1° and 12°) were assessed in a separate psychophysical paradigm. The MEG data were collected in 42 boys with ASD and 37 typically developing (TD) boys aged 7-15 years. Psychophysical data were available in 33 and 34 of these participants, respectively. The results showed that the GR suppression in V1 was reduced in boys with ASD, while their ability to detect the direction of motion was compromised only in the case of small stimuli. In TD boys, the GR suppression directly correlated with perceptual suppression caused by increasing stimulus size, thus suggesting the role of the top-down modulations of V1 in surround inhibition. In ASD, weaker GR suppression was associated with the poor directional sensitivity to small stimuli, but not with perceptual suppression. These results strongly suggest that a local inhibitory deficit in V1 plays an important role in the reduction of directional sensitivity in ASD and that this perceptual deficit cannot be explained exclusively by atypical top-down modulation of V1 by higher-tier cortical areas.