Acetylcholinesterase (AChE) inhibitors, which increase synaptic levels of available acetylcholine (ACh) by preventing its degradation, are the most extensively prescribed drugs for the treatment of Alzheimer's disease. In animals, AChE inhibitors improve learning and memory, reverse scopolamine-induced amnesia, and produce hippocampal theta rhythm. The medial septum/diagonal band of Broca (MSDB), which maintains hippocampal theta rhythm and associated mnemonic functions via the septohippocampal pathway, is considered a critical locus for mediating the effects of AChE inhibitors. Using electrophysiological recordings and fluorescent labeling techniques to identify living septohippocampal neurons in rat brain slices, we report that AChE inhibitors, in the absence of exogenous ACh, produce a profound excitation in 94% of septohippocampal GABAergic neurons and an inhibition in 24% of septohippocampal cholinergic neurons. The inhibitory and excitatory effects of AChE inhibitors, presumably, occur due to accumulation of ACh that is released locally within the MSDB via axon collaterals of septohippocampal cholinergic neurons. The excitatory effects of AChE inhibitors on septohippocampal GABAergic neurons were blocked by muscarinic but not nicotinic receptor antagonists, especially by the M3 receptor antagonist, 4-diphenylacetoxy-N-methylpiperidine mustard, and not by M1 or M2/M4 muscarinic receptor antagonists. M3 muscarinic receptor mRNA colocalized with the calcium-binding protein, parvalbumin, a marker of septohippocampal GABAergic neurons. These findings may be useful in designing therapeutic strategies that do not depend on endogenous ACh and may therefore be effective in situations where AChE inhibitors cease to be effective, such as in progressive neurodegeneration.