One important task for the visual system is to group image elements that belong to an object and to segregate them from other objects and the background. We here present an incremental grouping theory (IGT) that addresses the role of object-based attention in perceptual grouping at a psychological level and, at the same time, outlines the mechanisms for grouping at the neurophysiological level. The IGT proposes that there are two processes for perceptual grouping. The first process is base grouping and relies on neurons that are tuned to feature conjunctions. Base grouping is fast and occurs in parallel across the visual scene, but not all possible feature conjunctions can be coded as base groupings. If there are no neurons tuned to the relevant feature conjunctions, a second process called incremental grouping comes into play. Incremental grouping is a time-consuming and capacity-limited process that requires the gradual spread of enhanced neuronal activity across the representation of an object in the visual cortex. The spread of enhanced neuronal activity corresponds to the labeling of image elements with object-based attention.