GABAergic granule cells (GCs) regulate, via mitral cells, the final output from the olfactory bulb to piriform cortex and are central for the speed and accuracy of odour discrimination. However, little is known about the local circuits in which GCs are embedded and how GCs respond during functional network activity. We recorded inhibitory and excitatory currents evoked during a single sniff-like odour presentation in GCs in vivo. We found that synaptic excitation was extensively activated across cells, whereas phasic inhibition was rare. Furthermore, our analysis indicates that GCs are innervated by a persistent firing of deep short axon cells that mediated the inhibitory evoked responses. Blockade of GABAergic synaptic input onto GCs revealed a tonic inhibitory current mediated by furosemide-sensitive GABA(A) receptors. The average current associated with this tonic GABAergic conductance was 3-fold larger than that of phasic inhibitory postsynaptic currents. We show that the pharmacological blockage of tonic inhibition markedly increased the occurrence of supra-threshold responses during an odour-stimulated sniff. Our findings suggest that GCs mediate recurrent or lateral inhibition, depending on the ambient level of extracellular GABA.