In many brain regions, inhibition is mediated by numerous classes of specialized interneurons, but within the rodent dorsal lateral geniculate nucleus (dLGN), a single class of interneuron is present. dLGN interneurons inhibit thalamocortical (TC) neurons and regulate the activity of TC neurons evoked by retinal ganglion cells (RGCs), thereby controlling the visually evoked signals reaching the cortex. It is not known whether neuromodulation can regulate interneuron firing mode and the resulting inhibition. Here, we examine this in brain slices. We find that cholinergic modulation regulates the output mode of these interneurons and controls the resulting inhibition in a manner that is dependent on the level of afferent activity. When few RGCs are activated, acetylcholine suppresses synaptically evoked interneuron spiking, and strongly reduces disynaptic inhibition. In contrast, when many RGCs are coincidently activated, single stimuli promote the generation of a calcium spike, and stimulation with a brief train evokes prolonged plateau potentials lasting for many seconds that in turn lead to sustained inhibition. These findings indicate that cholinergic modulation regulates feedforward inhibition in a context-dependent manner.