In the Thatcher illusion, a face with inverted eyes and mouth looks abnormal when upright but not when inverted. Behavioral studies have shown that thatcherization of an upright face disrupts perceptual processing of the local configuration. We recorded high-density EEG from normal observers to study ERP correlates of the illusion during the perception of faces and nonface objects, to determine whether inversion and thatcherization affect similar neural mechanisms. Observers viewed faces and houses in four conditions (upright vs. inverted, and normal vs. thatcherized) while detecting an oddball category (chairs). Thatcherization delayed the N170 component over occipito-temporal cortex to faces, but not to houses. This modulation matched the illusion as it was larger for upright than inverted faces. The P1 over medial occipital regions was delayed by face inversion but unaffected by thatcherization. Finally, face thatcherization delayed P2 over occipito-temporal but not over parietal regions, while inversion affected P2 across categories. All effects involving thatcherization were face-specific. These results indicate that effects of face inversion and feature inversion (in thatcherized faces) can be distinguished on a functional as well as neural level, and that they affect configural processing of faces in different time windows.