Systemic infusions of the muscarinic cholinergic receptor antagonists atropine and scopolamine (atr/scop) produce an amnesic syndrome in humans, subhuman primates, and rodents. In humans, this syndrome may resemble early symptoms of Alzheimer's disease. Behavioral studies in rats have demonstrated that the medial septum/diagonal band of Broca (MSDB), which sends cholinergic and GABAergic projections to the hippocampus, is a critical locus in mediating the amnesic effects of atr/scop. The amnesic effects of atr/scop in the MSDB have been presumed but not proven to be caused by a decrease in hippocampal acetylcholine (ACh) release after blockade of a muscarinic tone in the MSDB. Using electrophysiological recordings and fluorescent-labeling techniques to identify living septohippocampal neurons in rat brain slices, we now report that, contrary to current belief, a blockade of the muscarinic tone in the MSDB does not decrease impulse flow in the septohippocampal cholinergic pathway; instead, it decreases impulse flow in the septohippocampal GABAergic pathway via M(3) muscarinic receptors. We also report that the muscarinic tone in the MSDB is maintained by ACh that is released locally, presumably via axon collaterals of septohippocampal cholinergic neurons. As such, cognitive deficits that occur in various neurodegenerative disorders that are associated with a loss or atrophy of septohippocampal cholinergic neurons cannot be attributed solely to a decrease in hippocampal acetylcholine release. An additional, possibly more important mechanism may be the concomitant decrease in septohippocampal GABA release and a subsequent disruption in disinhibitory mechanisms in the hippocampus. Restoration of impulse flow in the septohippocampal GABA pathway, possibly via M(3) receptor agonists, may, therefore, be critical for successful treatment of cognitive deficits associated with neurodegenerative disorders such as Alzheimer's and Parkinson's disease.