The rubber hand illusion (RHI) demonstrates that under some circumstances a fake hand can be regarded as part of one's body; the RHI and related phenomena have been used to explore the flexibility of the body schema. Recent work has shown that a sense of embodiment may be generated by virtual reality (VR). In a series of experiments, we used VR to assess the effects of the displacement of the virtual image of subjects' hands on action. Specifically, we tested whether spatial and temporal parameters of action change when participants perform a reaching movement towards the location of their virtual hand, the position of which was distorted on some trials. In different experiments, participants were sometimes provided with incorrect visual feedback regarding the position of the to-be-touched hand (Experiment 1), were deprived of visual feedback regarding the position of the reaching hand when acting (Experiment 2) or reached with the hand, the apparent position of which had been manipulated (Experiment 3). The effect was greatest when participants reached towards (Experiment 1) or with (Experiment 3) the displaced hand when the hand was visible during the reaching, but not when the vision of the hand was removed during the action (Experiment 2). Taken together, these data suggest that visual images of one's hand presented in VR influence the body schema and action performance.