The extracellular region of the transmembrane neural cell adhesion molecule (NCAM-EC) is shed as a soluble fragment at elevated levels in the schizophrenic brain. A novel transgenic mouse line was generated to identify consequences on cortical development and function of expressing soluble NCAM-EC from the neuron-specific enolase promoter in the developing and mature neocortex and hippocampus. NCAM-EC transgenic mice exhibited a striking reduction in synaptic puncta of GABAergic interneurons in the cingulate, frontal association cortex, and amygdala but not hippocampus, as shown by decreased immunolabeling of glutamic acid decarboxylase-65 (GAD65), GAD67, and GABA transporter 1. Interneuron cell density was unaltered in the transgenic mice. Affected subpopulations of interneurons included basket interneurons evident in NCAM-EC transgenic mice intercrossed with a reporter line expressing green fluorescent protein and by parvalbumin staining. In addition, there appeared to be a reduction in excitatory synapses, as revealed by synaptophysin staining and apical dendritic spine density of cortical pyramidal cells. Behavioral analyses demonstrated higher basal locomotor activity of NCAM-EC mice and enhanced responses to amphetamine and (+)-5-methyl-10,11-dihydro-5H-dibenzo[a,d]cyclohepten-5,10-imine maleate compared with wild-type controls. Transgenic mice were deficient in prepulse inhibition, which was restored by clozapine but not by haloperidol. Additionally, NCAM-EC mice were impaired in contextual and cued fear conditioning. These results suggested that elevated shedding of NCAM perturbs synaptic connectivity of GABAergic interneurons and produces abnormal behaviors that may be relevant to schizophrenia and other neuropsychiatric disorders.