The nucleus basalis of the basal forebrain is an essential component of the neuromodulatory system controlling the behavioral state of an animal and it is thought to be important in regulating arousal and attention. However, the effect of nucleus basalis activation on sensory processing remains poorly understood. Using polytrode recording in rat visual cortex, we found that nucleus basalis stimulation caused prominent decorrelation between neurons and marked improvement in the reliability of neuronal responses to natural scenes. The decorrelation depended on local activation of cortical muscarinic acetylcholine receptors, whereas the increased reliability involved distributed neural circuits, as evidenced by nucleus basalis-induced changes in thalamic responses. Further analysis showed that the decorrelation and increased reliability improved cortical representation of natural stimuli in a complementary manner. Thus, the basal forebrain neuromodulatory circuit, which is known to be activated during aroused and attentive states, acts through both local and distributed mechanisms to improve sensory coding.