Psychiatric diseases, notably major depression, are associated with imbalance of excitatory and inhibitory neurotransmission within the prefrontal cortex (PFC) and related limbic brain circuitry. In many cases these illnesses are precipitated or exacerbated by chronic stress, which also alters excitatory and inhibitory neurotransmitter systems. Notably, exposure to repeated uncontrollable stress causes persistent changes in the synaptic integrity and function of the principal glutamatergic excitatory neurons in the PFC, characterized by neuronal atrophy and loss of synaptic connections. This can lead to dysfunction of the PFC circuitry that is necessary for execution of adaptive behavioral responses. In addition, an emerging literature shows that chronic stress also causes extensive alteration of GABAergic inhibitory circuits in the PFC, leading to the hypothesis that inhibitory neurotransmitter deficits contribute to changes in PFC neuronal excitability and cognitive impairments. Here we review evidence in rodents and human, which point to the mechanisms underlying stress-induced alterations of GABA transmission in the PFC, and its relevance to circuit dysfunction in mood and stress related disorders. These findings suggest that alterations of GABA interneurons and inhibitory neurotransmission play a causal role in the development of stress-related neurobiological illness, and could identify a new line of GABA related therapeutic targets.