It has been suggested that nitric oxide (NO) serves as a retinal neuromodulator, adjusting retinal function to changing conditions of adaptation. We tested this hypothesis in the intact turtle retina by recording the photoresponses of L-cones and L1-horizontal cells, while changing retinal NO level and background illumination. Raising the retinal level of NO, by adding an NO donor (sodium nitroprusside) or the precursor for NO synthesis (L-arginine), induced response augmentation in L-cones and L1-horizontal cells. Lowering retinal level of NO by adding L-NAME, an inhibitor of NO synthesis, reduced the amplitudes of the photoresponses in these retinal neurons. The transfer function between L-cones and L1-horizontal cells, constructed from the photoresponses of these cells, was modified by NO and by background lights. The nonlinear transfer function, characteristic of the dark-adapted retina, became linear and of low gain when the retinal NO level was increased or by increasing the level of ambient illumination. In contrast, inhibiting NO synthesis in the light-adapted retina induced nonlinearity in the cone-to-horizontal cell transfer function similar to that seen in the dark-adapted state. NADPH diaphorase histochemistry, conducted on isolated retinal cells, demonstrated activity in cone inner segments and distal process of Müller cells. These findings support the hypothesis that NO synthesis in the distal turtle retina is triggered by background illumination, and that NO acts to adjust the modes of visual information processing in the outer plexiform layer to the conditions required during continuous background illumination.