1. To determine how acetylcholine (ACh) modulates the somatodendritic processing of EPSPs, we performed whole-cell recordings from CA1 pyramidal cells of hippocampal slices and examined the effect of the cholinergic agonist, carbachol (CCh), on alpha-amino-3-hydroxy-5-methyl isoxazole-4-propionate (AMPA) EPSPs, miniature EPSPs, and EPSP-like waveforms evoked by brief dendritic glutamate pulses (glutamate-evoked postsynaptic potentials, GPSPs). 2. Although CCh is known to enhance the intrinsic excitability of the neuron in several ways, activation of atropine-sensitive (muscarinic) receptors on the apical dendrite or the soma of CA1 pyramidal cells consistently reduced the amplitude of EPSPs and GPSPs. 3. Cholinergic inhibition of evoked and simulated EPSP waveforms displayed considerable voltage dependence, with the amplitude of the postsynaptic potentials progressively declining with membrane hyperpolarization indicating the involvement of an inwardly rectifying current. 4. Extracellular Ba(2+) (200 microM) and tertiapin (30 nM), a novel and selective blocker of G protein-activated, inwardly rectifying K(+) (GIRK) channels, completely blocked the effect of CCh on GPSP amplitude. 5. Muscarinic reduction of GPSPs was not sensitive to the M1 receptor-preferring antagonist, pirenzepine, but was suppressed by the M2 receptor-preferring antagonist, methoctramine, and by the allosteric M2 receptor antagonist, gallamine. 6. In voltage-clamp recordings, CCh induced an ion current displaying inward rectification in the hyperpolarizing direction, which was identified as a GIRK current based on its sensitivity to low Ba(2+) and tertiapin. Its pharmacological profile paralleled that of the cholinergic GPSP reduction. 7. We link the observed reduction of postsynaptic potentials to the cholinergic activation of a GIRK conductance, which serves to partially shunt excitatory synaptic input.