We report optical and near-infrared follow-up observations of GRB 011121 collected predominantly at ESO telescopes in Chile. We discover a break in the afterglow light curve after 1.3 days, which implies an initial jet opening angle of about 9°. The jet origin of this break is supported by the fact that the spectral energy distribution is achromatic during the first 4 days. During later phases, GRB 011121 shows significant excess emission above the flux predicted by a power law, which we interpret as additional light from an underlying supernova. In particular, the spectral energy distribution of the optical transient approximately 2 weeks after the burst is clearly not of power-law type but can be presented by a blackbody with a temperature of ~6000 K. The deduced parameters for the decay slope and the spectral index favor a wind scenario, i.e., an outflow into a circumburst environment shaped by the stellar wind of a massive gamma-ray burst (GRB) progenitor. Because of its low redshift of z=0.36, GRB 011121 has been the best example for the GRB-supernova connection until GRB 030329 and provides compelling evidence for a circumburster wind region expected to exist if the progenitor was a massive star. Based on observations collected at the European Southern Observatory, La Silla and Paranal, Chile (ESO Programme 165.H-0464).