Neuregulin 3 (NRG3) and ErbB4 have been linked to nicotine addiction; however, the neuronal mechanisms and behavioral consequences of NRG3-ErbB4 sensitivity to nicotine remain elusive. Recent literature suggests that relapse to smoking is due to a lack of impulsive control, which is thought to be due to altered functioning within the orbitofrontal cortex (OFC). Therefore, we examined circuitry changes within this structure following nicotine application. We report that nicotine controls synaptic plasticity in the OFC through NRG3/ErbB4-dependent regulation of GABAergic inhibition. We observed that both nicotine and NRG3 facilitated the conversion of long-term potentiation into long-term depression at cortical layer 3/5 synapses. Induction of long-term depression by nicotine relied on nicotinic receptor activation and key regulators of NRG3 signaling: (1) release of intracellular calcium, (2) activation of the BACE1 beta-secretase, and (3) ErbB4 receptor activation. Nicotine-induced synaptic plasticity was also associated with accumulation of intracellular GABA and was completely blocked by GABAA/GABAB antagonists. To test whether these mechanisms underlie OFC-dependent behavior, we evaluated the effects of nicotine in the go/no-go task. Nicotine-impaired stimulus discrimination in this task was rescued by pharmacologic disruption of the NRG3 receptor, ErbB4. Altogether, our data indicate that nicotine-induced synaptic plasticity in the OFC and cognitive changes depend on NRG3-ErbB4 signaling. We propose that nicotine activation of this pathway may contribute to nicotine addiction, particularly in individuals with genetic variation in NRG3.