The midbrain periaqueductal gray (PAG) is involved in organizing behavioral responses to threat, stress, and pain. These PAG functions are modulated by cholinergic agents. In the present study, we examined the cholinergic modulation of synaptic transmission in the PAG using whole-cell voltage-clamp recordings from rat midbrain slices. We found that the cholinergic agonist carbachol reduced the amplitude of evoked inhibitory and excitatory postsynaptic currents (IPSCs and EPSCs, respectively) in all PAG neurons, and this was abolished by the muscarinic receptor antagonist atropine. Carbachol increased the paired pulse ratio of evoked IPSCs and EPSCs, and it reduced the rate, but not the amplitude of spontaneous miniature IPSCs. The carbachol inhibition of evoked IPSCs was mimicked by the acetylcholinesterase inhibitor physostigmine and was reduced by the M1 and M1/M3 muscarinic receptor antagonists pirenzepine and 4-diphenylacetoxy-N-methylpiperidine, but not by the M2 and M4 antagonists gallamine and PD-102807 (3,6a,11,14-tetrahydro-9-methoxy-2-methyl-(12H)-isoquino [1,2-b]pyrrolo[3,2-f][1,3]benzoxazine-1-carboxylic acid, ethyl ester). The carbachol inhibition of evoked IPSCs was reduced by the cannabinoid CB(1) receptor antagonist AM251 (1-(2,4-dichlorophenyl)-5-(4-iodophenyl)-4-methyl-N-1-piperidinyl-1H-pyrazole-3-carboxamide) and the diacylglycerol (DAG) lipase inhibitor tetrahydrolipstatin, and it was abolished in the presence of both AM251 and gallamine. The carbachol inhibition of evoked EPSCs was also reduced in the combined presence of gallamine and AM251. These results indicate that M1 induced inhibition of GABAergic transmission within the PAG is mediated via endocannabinoids, which are produced via the phospholipase C/DAG lipase pathway and activate presynaptic cannabinoid CB(1) receptors. Thus, presynaptic muscarinic modulation of PAG function is mediated indirectly by M1 receptor-induced endocannabinoid signaling and directly by M2 receptors.