Antagonism of nicotinic acetylcholine receptors (nAChRs) in the medial habenula (MHb) or interpeduncular nucleus (IPN) triggers withdrawal-like behaviors in mice chronically exposed to nicotine, implying that nicotine dependence involves the sensitization of nicotinic signaling. Identification of receptor and/or neurophysiological mechanisms underlying this sensitization is important, as it could promote novel therapeutic strategies to reduce tobacco use. Using an approach involving photoactivatable nicotine, we previously demonstrated that chronic nicotine (cNIC) potently enhances nAChR function in dendrites of MHb neurons. However, whether cNIC modulates downstream components of the habenulo-interpeduncular (Hb-IP) circuit is unknown. In this study, cNIC-mediated changes to Hb-IP nAChR function were examined in mouse (male and female) brain slices using molecular, electrophysiological, and optical techniques. cNIC enhanced action potential firing and modified spike waveform characteristics in MHb neurons. Nicotine uncaging revealed nAChR functional enhancement by cNIC on proximal axonal membranes. Similarly, nAChR-driven glutamate release from MHb axons was enhanced by cNIC. In IPN, the target structure of MHb axons, neuronal morphology, and nAChR expression is complex, with stronger nAChR function in the rostral subnucleus [rostral IPN (IPR)]. As in MHb, cNIC induced strong upregulation of nAChR function in IPN neurons. This, coupled with cNIC-enhanced nicotine-stimulated glutamate release, was associated with stronger depolarization responses to brief (1 ms) nicotine uncaging adjacent to IPR neurons. Together, these results indicate that chronic exposure to nicotine dramatically alters nicotinic cholinergic signaling and cell excitability in Hb-IP circuits, a key pathway involved in nicotine dependence.SIGNIFICANCE STATEMENT This study uncovers several neuropharmacological alterations following chronic exposure to nicotine in a key brain circuit involved in nicotine dependence. These results suggest that smokers or regular users of electronic nicotine delivery systems (i.e., "e-cigarettes") likely undergo sensitization of cholinergic circuitry in the Hb-IP system. Reducing the activity of Hb-IP nAChRs, either volitionally during smoking cessation or inadvertently via receptor desensitization during nicotine intake, may be a key trigger of withdrawal in nicotine dependence. Escalation of nicotine intake in smokers, or tolerance, may involve stimulation of these sensitized cholinergic pathways. Smoking cessation therapeutics are only marginally effective, and by identifying cellular/receptor mechanisms of nicotine dependence, our results take a step toward improved therapeutic approaches for this disorder.