The first aim of this event-related fMRI study was to identify the neural circuits involved in imitation learning. We used a rapid imitation task where participants directly imitated pictures of guitar chords. The results provide clear evidence for the involvement of dorsolateral prefrontal cortex, as well as the fronto-parietal mirror circuit (FPMC) during action imitation when the requirements for working memory are low. Connectivity analyses further indicated a robust connectivity between left prefrontal cortex and the components of the FPMC bilaterally. We conclude that a mechanism of automatic perception-action matching alone is insufficient to account for imitation learning. Rather, the motor representation of an observed, complex action, as provided by the FPMC, only serves as the ‘raw material’ for higher-order supervisory and monitoring operations associated with the prefrontal cortex. The second aim of this study was to assess whether these neural circuits are also recruited during observational practice (OP, without motor execution), or only during physical practice (PP). Whereas prefrontal cortex was not consistently activated in action observation across all participants, prefrontal activation intensities did predict the behavioural practice effects, thus indicating a crucial role of prefrontal cortex also in OP. In addition, whilst OP and PP produced similar activation intensities in the FPMC when assessed during action observation, during imitative execution, the practice-related activation decreases were significantly more pronounced for PP than for OP. This dissociation indicates a lack of execution-related resources in observationally practised actions. More specifically, we found neural efficiency effects in the right motor cingulate-basal ganglia circuit and the FPMC that were only observed after PP but not after OP. Finally, we confirmed that practice generally induced activation decreases in the FPMC during both action observation and imitation sessions and outline a framework explaining the discrepant findings in the literature.