Embryonic medial ganglionic eminence (MGE) cells transplanted into the adult brain can disperse, migrate, and differentiate to neurons expressing GABA, the primary inhibitory neurotransmitter. It has been hypothesized that grafted MGE precursors could have important therapeutic applications increasing local inhibition, but there is no evidence that MGE cells can modify neural circuits when grafted into the postnatal brain. Here we demonstrate that MGE cells grafted into one location of the neonatal rodent brain migrate widely into cortex. Grafted MGE-derived cells differentiate into mature cortical interneurons; the majority of these new interneurons express GABA. Based on their morphology and expression of somatostatin, neuropeptide Y, parvalbumin, or calretinin, we infer that graft-derived cells integrate into local circuits and function as GABA-producing inhibitory cells. Whole-cell current-clamp recordings obtained from MGE-derived cells indicate firing properties typical of mature interneurons. Moreover, patch-clamp recordings of IPSCs on pyramidal neurons in the host brain, 30 and 60 d after transplantation, indicated a significant increase in GABA-mediated synaptic inhibition in regions containing transplanted MGE cells. In contrast, synaptic excitation is not altered in the host brain. Grafted MGE cells, therefore, can be used to modify neural circuits and selectively increase local inhibition. These findings could have important implications for reparative cell therapies for brain disorders.