Correlations between the activities of neighboring neurons are observed ubiquitously across systems and species and are dynamically regulated by several factors such as the stimulus spatiotemporal extent as well as by the brains internal state. Using the electrosensory system of gymnotiform weakly electric fish, we recorded the activities of pyramidal cell pairs within the electrosensory lateral line lobe (ELL) under spatially localized and diffuse stimulation. We found that both signal and noise correlations were markedly reduced (>40%) under the latter stimulation. Through a network model incorporating key anatomical features of the ELL, we reveal how activation of diffuse parallel fiber feedback from granule cells by spatially diffuse stimulation can explain both the reduction in signal as well as the reduction in noise correlations seen experimentally through independent mechanisms. First, we show that burst-timing dependent plasticity, which leads to a negative image of the stimulus and thereby reduces single neuron responses, decreases signal but not noise correlations. Second, we show trial-to-trial variability in the responses of single granule cells to sensory input reduces noise but not signal correlations. Thus, our model predicts that the same feedback pathway can simultaneously reduce both signal and noise correlations through independent mechanisms. To test this prediction experimentally, we pharmacologically inactivated parallel fiber feedback onto ELL pyramidal cells. In agreement with modeling predictions, we found that inactivation increased both signal and noise correlations but that there was no significant relationship between magnitude of the increase in signal correlations and the magnitude of the increase in noise correlations. The mechanisms reported in this study are expected to be generally applicable to the cerebellum as well as other cerebellum-like structures. We further discuss the implications of such decorrelation on the neural coding strategies used by the electrosensory and by other systems to process natural stimuli. 