Tonic impulse flow in the septohippocampal GABAergic pathway is essential for normal cognitive functioning and is sustained, in part, by acetylcholine (ACh) that is released locally via axon collaterals of septohippocampal cholinergic neurons. Septohippocampal cholinergic neurons degenerate in Alzheimer's disease and other neurodegenerative disorders. While the importance of the muscarinic effects of ACh on septohippocampal GABAergic neurons is well recognized, the nicotinic effects of ACh remain unstudied despite the reported benefits of nicotine on cognitive functioning. In the present study, using electrophysiological recordings in a rat brain slice preparation, rapid applications of nicotine excited 90% of retrogradely labelled septohippocampal GABA-type neurons with an EC50 of 17 µm and increased the frequency of spontaneously occurring, impulse-dependent fast GABAergic and glutamatergic synaptic currents via the α4β2-nicotinic receptor. Interestingly, tetrodotoxin blocked all effects of nicotine on septohippocampal GABAergic type neurons, suggesting involvement of indirect mechanisms. We demonstrate that the effects of nicotine on septohippocampal GABA-type neurons involve recruitment of a novel, local glutamatergic circuitry as (i) Group I metabotropic glutamatergic receptor antagonists reduced the effects of nicotine; (ii) the number of nicotine responsive neurons was significantly reduced in recordings from slices that had been trimmed so as to reduce the number of glutamate-containing neurons within the slice preparation; (iii) in light and ultrastructural double immunocytochemical labelling studies vesicular glutamate 2 transporter immunoreactive terminals made synaptic contacts with parvalbumin-immunoreactive septohippocampal GABAergic neurons. The discovery of a local glutamatergic circuit within the septum may provide another avenue for restoring septohippocampal GABAergic functions in neurodegenerative disorders associated with a loss of septohippocampal cholinergic neurons.