Recurrent connectivity between excitatory neurons and the strength of feedback from inhibitory neurons are critical determinants of the dynamics and computational properties of neuronal circuits. Toward a better understanding of these circuit properties in regions CA1 and CA3 of the hippocampus, we performed optogenetic manipulations combined with large-scale unit recordings in rats under anesthesia and in quiet waking, using photoinhibition and photoexcitation with different light-sensitive opsins. In both regions, we saw striking paradoxical responses: subsets of cells increased firing during photoinhibition, while other cells decreased firing during photoexcitation. These paradoxical responses were more prominent in CA3 than in CA1, but, notably, CA1 interneurons showed increased firing in response to photoinhibition of CA3. These observations were recapitulated in simulations where we modeled both CA1 and CA3 as inhibition-stabilized networks in which strong recurrent excitation is balanced by feedback inhibition. To directly test the inhibition-stabilized model, we performed large-scale photoinhibition directed at (GAD-Cre) inhibitory cells and found that interneurons in both regions increased firing when photoinhibited, as predicted. Our results highlight the often-paradoxical circuit dynamics that are evidenced during optogenetic manipulations and indicate that, contrary to long-standing dogma, both CA1 and CA3 hippocampal regions display strongly recurrent excitation, which is stabilized through inhibition.