The local field potential (LFP) reflects activity of many neurons in the vicinity of the recording electrode and is therefore useful for studying local network dynamics. Much of the nature of the LFP is, however, still unknown. There are, for instance, contradicting reports on the spatial extent of the region generating the LFP. Here, we use a detailed biophysical modeling approach to investigate the size of the contributing region by simulating the LFP from a large number of neurons around the electrode. We find that the size of the generating region depends on the neuron morphology, the synapse distribution, and the correlation in synaptic activity. For uncorrelated activity, the LFP represents cells in a small region (within a radius of a few hundred micrometers). If the LFP contributions from different cells are correlated, the size of the generating region is determined by the spatial extent of the correlated activity.