Neural responses are noisy, and circuit structure can correlate this noise across neurons. Theoretical studies show that noise correlations can have diverse effects on population coding, but these studies rarely explore stimulus dependence of noise correlations. Here, we show that noise correlations in responses of ON-OFF direction-selective retinal ganglion cells are strongly stimulus dependent, and we uncover the circuit mechanisms producing this stimulus dependence. A population model based on these mechanistic studies shows that stimulus-dependent noise correlations improve the encoding of motion direction 2-fold compared to independent noise. This work demonstrates a mechanism by which a neural circuit effectively shapes its signal and noise in concert, minimizing corruption of signal by noise. Finally, we generalize our findings beyond direction coding in the retina and show that stimulus-dependent correlations will generally enhance information coding in populations of diversely tuned neurons.