The modulatory influence of nicotinic acetylcholine receptor (nAChRs) on thalamocortical transmission was characterized in the prelimbic area (PrL) of the rat prefrontal cortex. In the first experiment, rats received a unilateral excitotoxic lesion centred on the mediodorsal thalamic nucleus (MD), and were sacrificed 1 week later. The lesion resulted in a 40% reduction of 3H-nicotine autoradiographic labelling in the ipsilateral prefrontal cortex, particularly in areas that are innervated by the MD. Electrophysiological experiments were subsequently performed in non-lesioned anaesthetized animals, in order to study modulation of short- and long-latency responses of PrL neurons evoked by electrical stimulation of the MD. The short-latency responses result from activation of the MD–PrL pathway and are mediated via AMPA-type glutamatergic receptors, whereas the long-latency responses reflect activation of the recurrent collaterals of cortical pyramidal neurons. Iontophoretic application of nicotinic agonists (nicotine, DMPP) facilitated both types of response. Local application of the nAChR antagonists dihydro-beta-erythroidine, mecamylamine and methyllycaconitine, prevented both kinds of facilitation. Finally, intracerebral microdialysis experiments were performed in order to test for nicotinic modulation of extracellular glutamate concentrations in the PrL. Direct application of nicotine via the dialysis probe increased glutamate levels in a dose-dependent manner. This effect was blocked by local perfusion of dihydro-beta-erythroidine. These findings therefore provide anatomical and functional evidence for nAChR-mediated modulation of thalamocortical input to the prefrontal cortex. Such a mechanism may be relevant to the cognitive effects of nicotine and nicotinic antagonists.