Hydrophobic bile salts are thought to contribute to the disruption of gallbladder smooth muscle (GBSM) function that occurs in gallstone disease, but their mechanism of action is unknown. The current study was undertaken to determine how hydrophobic bile salts interact with GBSM, and how they reduce GBSM activity. The effect of hydrophobic bile salts on the activity of GBSM was measured by intracellular recording and calcium imaging using wholemount preparations from guinea pig and mouse gallbladder. RT-PCR and immunohistochemistry were used to evaluate expression of the G protein-coupled bile acid receptor, GPBAR1. Application of tauro-chenodeoxycholate (CDC, 50–100 μm) to in situ GBSM rapidly reduced spontaneous Ca2+ flashes and action potentials, and caused a membrane hyperpolarization. Immunoreactivity and transcript for GPBAR1 were detected in gallbladder muscularis. The GPBAR1 agonist, tauro-lithocholic acid (LCA, 10 μm) mimicked the effect of CDC on GBSM. The actions of LCA were blocked by the protein kinase A (PKA) inhibitor, KT5720 (0.5–1.0 μm) and the KATP channel blocker, glibenclamide (10 μm). Furthermore, LCA failed to disrupt GBSM activity in Gpbar1−/− mice. The findings of this study indicate that hydrophobic bile salts activate GPBAR1 on GBSM, and this leads to activation of the cyclic AMP–PKA pathway, and ultimately the opening of KATP channels, thus hyperpolarizing the membrane and decreasing GBSM activity. This inhibitory effect of hydrophobic bile salt activation of GPBAR1 could be a contributing factor in the manifestation of gallstone disease.