Homopentameric alpha7 nicotinic receptors have a high affinity for acetylcholine (ACh), are permeable to Ca2+ ions, and are abundant in hippocampal interneurons. Although nicotinic agonists evoke inward currents and Ca2+ transients in stratum radiatum interneurons, the role of endogenous ACh in modulating synaptic integration by interneurons is incompletely understood. Many cholinergic axonal varicosities do not have postsynaptic specializations, but alpha7 receptors frequently occur close to synaptic GABA(A) receptors. These observations raise the possibility that alpha7 nicotinic receptors activated by ACh released from cholinergic axons modulate GABAergic transmission in interneurons. We show that agonists of alpha7 receptors profoundly depress GABAergic IPSCs recorded in stratum radiatum interneurons in the CA1 region of the hippocampus. This depression is accompanied by a small increase in GABA release. Alpha7 nicotinic receptor agonists also depress GABA- or muscimol-evoked currents in interneurons, indicating that the major effect is a postsynaptic modulation of GABA(A) receptors. The depression of GABA-evoked currents is abolished by chelating Ca2+ in the recorded interneuron and attenuated by inhibitors of PKC. We also show that stimuli designed to release endogenous ACh from cholinergic axons evoke an alpha7 receptor-dependent heterosynaptic depression of GABAergic IPSCs in interneurons. This heterosynaptic modulation is amplified by blocking cholinesterases. These results reveal a novel mechanism by which cholinergic neurons modulate information processing in the hippocampus.