Different levels of cholinergic neuromodulatory tone have been hypothesized to set the state of cortical circuits either to one dominated by local cortical recurrent activity (low ACh) or to one dependent on thalamic input (high ACh). High ACh levels depress intracortical but facilitate thalamocortical synapses, whereas low levels potentiate intracortical synapses. Furthermore, recent work has implicated the thalamus in controlling cortical network state during waking and attention, when ACh levels are highest. To test this hypothesis, we used rat thalamocortical slices maintained in medium to generate spontaneous up- and down-states and applied different ACh concentrations to slices in which thalamocortical connections were either maintained or severed. The effects on spontaneous and evoked up-states were measured using voltage-sensitive dye imaging, intracellular recordings, local field potentials, and single/multiunit activity. We found that high ACh can increase the frequency of spontaneous up-states, but reduces their duration in slices with intact thalamocortical connections. Strikingly, when thalamic connections are severed, high ACh instead greatly reduces or abolishes spontaneous up-states. Furthermore, high ACh reduces the spatial propagation, velocity, and depolarization amplitude of evoked up-states. In contrast, low ACh dramatically increases up-state frequency regardless of the presence or absence of intact thalamocortical connections and does not reduce the duration, spatial propagation, or velocity of evoked up-states. Therefore, our data support the hypothesis that strong cholinergic modulation increases the influence, and thus the signal-to-noise ratio, of afferent input over local cortical activity and that lower cholinergic tone enhances recurrent cortical activity regardless of thalamic input.