Performance on a target can be strongly modified by context. For example, vernier offset discrimination is strongly deteriorated by neighboring flankers. Performance is worst when the flankers have the same length as the vernier. Surprisingly, performance improves for longer and shorter flankers [Malania et al., 2007, Journal of Vision, 7(2):1, 1-7]. It was proposed that interference is strongest when the vernier and the flankers group, and weaker when they ungroup. Here, we used high density EEG to investigate the time course of this contextual modulation. A vernier was flanked on both sides by ten lines which were either shorter, longer, or of the same length as the vernier. Performance was worst for equal length flankers, and best for longer flankers. The P1 amplitude monotonically increased with flanker size, reflecting the stimulus layout. The N1 amplitude was highly correlated with performance and, hence, with the strength of grouping: longer flankers elicited the highest amplitude of the N1 wave, shorter flankers medium amplitude, and the equal length flankers elicited the lowest one. Our study shows that the N1 wave is a good predictor for perceptual grouping and hence contextual modulation. These processes seem to occur after the P1 wave, i.e. after basic feature extraction.