Sleep is regulated by a circadian clock that times sleep and wake to specific times of day and a homeostat that drives sleep as a function of prior wakefulness. To analyze the role of the circadian clock, we have used the fruit fly Drosophila. Flies display the core behavioral features of sleep, including relative immobility, elevated arousal thresholds, and homeostatic regulation. We assessed sleep-wake modulation by a core set of circadian pacemaker neurons that express the neuropeptide PDF. We find that disruption of PDF function increases sleep during the late night in light:dark and the first subjective day of constant darkness. Flies deploy genetic and neurotransmitter pathways to regulate sleep that are similar to those of their mammalian counterparts, including GABA. We find that RNA interference-mediated knockdown of the GABA(A) receptor gene, Resistant to dieldrin (Rdl), in PDF neurons reduces sleep, consistent with a role for GABA in inhibiting PDF neuron function. Patch-clamp electrophysiology reveals GABA-activated picrotoxin-sensitive chloride currents on PDF+ neurons. In addition, RDL is detectable most strongly on the large subset of PDF+ pacemaker neurons. These results suggest that GABAergic inhibition of arousal-promoting PDF neurons is an important mode of sleep-wake regulation in vivo.