Empathy is fundamental to human relations, but its neural substrates remain largely unknown. Here we characterize the involvement of oxytocin in the capacity of mice to display emotional state-matching, an empathy-like behavior. When exposed to a familiar conspecific demonstrator in distress, an observer mouse becomes fearful, as indicated by a tendency to freeze and subsequent efforts to escape. Both intranasal oxytocin administration and chemogenetic stimulation of oxytocin neurons render males sensitive to the distress of an unfamiliar mouse. Acute intranasal oxytocin penetrates the brain and enhances cellular activity within the anterior cingulate cortex, whereas chronic administration produces long-term facilitation of observational fear and downregulates oxytocin receptor expression in the amygdala. None of these manipulations affect fear acquired as a result of direct experience with the stressor. Hence, these results implicate oxytocin in observational fear in mice (rather than fear itself) and provide new avenues for examining the neural substrates of empathy.