A deficient extinction of memory is particularly important in the regime of fear, where it limits the beneficial outcomes of treatments of anxiety disorders. Fear extinction is thought to involve inhibitory influences of the prefrontal cortex on the amygdala, although the detailed synaptic mechanisms remain unknown. Here, we report that neuropeptide S (NPS), a recently discovered transmitter of ascending brainstem neurons, evokes anxiolytic effects and facilitates extinction of conditioned fear responses when administered into the amygdala in mice. An NPS receptor antagonist exerts functionally opposing responses, indicating that endogenous NPS is involved in anxiety behavior and extinction. Cellularly, NPS increases glutamatergic transmission to intercalated GABAergic neurons in the amygdala via presynaptic NPS receptors on connected principal neurons. These results identify mechanisms of NPS in the brain, a key role of intercalated neurons in the amygdala for fear extinction, and a potential pharmacological avenue for treating anxiety disorders.