The m2 muscarinic acetylcholine receptor gene is expressed at high levels in basal forebrain, but the paucity of information about localization of the encoded receptor protein has limited the understanding of cellular and subcellular mechanisms involved in cholinergic actions in this region. The present study sought to determine the cellular localization of m2 protein, its relationship to cholinergic neurons, and its pre- and postsynaptic distribution in the rat medial septum-diagonal band complex using immunocytochemistry with polyclonal rabbit antibodies and a newly developed rat monoclonal antibody specific to the m2 receptor. Light microscopic colocalization studies demonstrated that m2 was present in a subset of choline acetyltransferase immunoreactive neurons, in choline acetyltransferase-negative neurons, and in more neuropil elements than was choline acetyltransferase. Intraventricular injections of 192 IgG-saporin, an immunotoxin directed to the low-affinity nerve growth factor receptor, resulted in depletion of choline acetyltransferase-immunoreactive neurons in the medial septum-diagonal band complex, whereas m2 immunoreactivity in neurons and in the neuropil was unchanged. By electron microscopy, m2 receptor in medial septum-diagonal band complex was localized to the plasmalemma of a small population of small to medium-sized neurons, and it was also found in dendrites, axons, and axon terminals in the neuropil. Neurons expressing m2 immunoreactivity received synaptic contacts from unlabelled axon terminals. A small distinct subpopulation of large neurons, unlabelled by m2 immunoreactivity, received synaptic contacts from m2-immunoreactive terminals. Thus, m2 receptor is situated to mediate the local effects of acetylcholine on basal forebrain cholinergic and noncholinergic neurons and, also, at both pre- and postsynaptic sites.