Cholinergic modulation of synaptic transmission in the hippocampus appears to be involved in learning, memory and attentional processes. In brain slice preparations of hippocampal region CA3, we have explored the effect of nicotine on the afferent connections of stratum lacunosum moleculare (SLM) vs. the intrinsic connections of stratum radiatum (SR). Nicotine application had a lamina-selective effect, causing changes in synaptic transmission only in SLM. The nicotinic effect in SLM was characterized by a transient decrease in synaptic potential size followed by a longer period of enhancement of synaptic transmission. The effect was blocked by γ-aminobutyric acid (GABA)ergic antagonists, indicating the role of GABAergic interneurons in the observed nicotinic effect. The biphasic nature of the nicotinic effect could be due to a difference in receptor subtypes, as supported by the effects of the nicotinic antagonists mecamylamine and methyllycaconitine. Nicotinic modulation of glutamatergic synaptic transmission could complement muscarinic suppression of intrinsic connections, amplifying incoming information and providing a physiological mechanism for the memory-enhancing effect of nicotine.