The furosemide-sensitive potassium-chloride cotransporter (KCC2) plays an important role in establishing the intracellular chloride concentration in many neurons within the central nervous system. Consequently, modulation of KCC2 function will regulate the reversal potential for synaptic GABAergic inputs, thus setting the strength of inhibitory transmission. We show that tonic activation of group I metabotropic glutamate receptors (mGluR1s) regulates inhibitory synaptic strength via modulation of KCC2 function in pyramidal neurons of the hippocampal CA3 area. Specifically, group I mGluRs signal via activation of a protein kinase C-dependent pathway to alter KCC2 activity, thereby altering the intracellular chloride concentration, and thus inhibitory synaptic input. This interaction between the glutamatergic and chloride transport systems highlights a novel homeostatic mechanism whereby ambient glutamate levels directly regulate the inhibitory synaptic tone by setting the activity level of KCC2. Thus, mGluRs are poised to play a pivotal role in providing a direct interplay between the excitatory and inhibitory systems in the hippocampus.