Learning about threats from observing others has significant adaptive value, but excessive responding to observed threats interferes with other essential functions and in humans causes trauma-related disorders. To elucidate neural underpinnings of observational fear, we conditioned mice to an auditory cue by watching a demonstrator undergo cue-shock pairings. We found input to dorsomedial prefrontal cortex (dmPFC) from basolateral amygdala (BLA) and ventral hippocampal (vHPC) respectively promote and constrain observer freezing. Additionally, we found dmPFC neurons independently code observed and directly experienced threat, and that dmPFC projections to midbrain periaqueductal gray (PAG) signal the dynamic transfer of threat information from demonstrator-to-observer to limit freezing in observers. Our findings reveal how coordination and competition between long-range brain circuits is computed by dmPFC to calibrate an appropriate response to observed threat.