Fetal ethanol exposure persistently affects hippocampal circuits leading to learning and memory disabilities. Although the mechanisms responsible for these effects are not fully understood, several studies implicate neurosteroids as mediators of the actions of ethanol. A neurosteroid that appears to be critical for the fetal actions of ethanol is pregnenolone sulfate (PREGS). We found that chronic prenatal ethanol exposure increases PREGS levels in the fetal brain and that an endogenous PREGS-like neurosteroid strengthens excitatory transmission in the neonatal hippocampus. Therefore, we hypothesized that ethanol could affect synaptic transmission in the developing hippocampus in a PREGS-dependent manner. We used patch-clamp electrophysiological techniques and found that 50 mm ethanol strengthens AMPA receptor-mediated transmission in the CA1 region by reducing the failure rate of low-efficacy synapses. This effect was age-dependent and was occluded by application of exogenous PREGS. An anti-PREGS antibody scavenger and blockade of PREGS synthesis prevented the effect of ethanol. These data indicate that the deleterious effects of ethanol on hippocampal development are mediated in part by alterations in neurosteroid production, which results in premature stabilization of excitatory synapses.