Nicotine use can lead to dependence through complex processes that are regulated by both its rewarding and aversive effects. Recent studies show that aversive nicotine doses activate excitatory inputs to the interpeduncular nucleus (IPN) from the medial habenula (MHb), but the downstream targets of the IPN that mediate aversion are unknown. Here we show that IPN projections to the laterodorsal tegmentum (LDTg) are GABAergic using optogenetics in tissue slices from mouse brain. Selective stimulation of these IPN axon terminals in LDTg in vivo elicits avoidance behavior, suggesting that these projections contribute to aversion. Nicotine modulates these synapses in a concentration-dependent manner, with strong enhancement only seen at higher concentrations that elicit aversive responses in behavioral tests. Optogenetic inhibition of the IPN-LDTg connection blocks nicotine conditioned place aversion, suggesting that the IPN-LDTg connection is a critical part of the circuitry that mediates the aversive effects of nicotine.