The physiological and pharmacological actions of serotonin (5-HT) on neurons in the medial septum and diagonal band of Broca (MSDB) were examined using extracellular and intracellular recording techniques in an in vitro rat brain-slice preparation. In addition to previously described inhibitory effects, novel excitatory actions of 5-HT on GABA-type cells were observed. In intracellular recordings with KCl-containing electrodes, bath-applied 5-HT induced a bicuculline and tetrodotoxin-sensitive increase in the number of reverse IPSPs in both cholinergic- and noncholinergic-type neurons (presumably GABAergic). In brain slices where all structures neighboring the MSDB, including the lateral septum, had been excised, a similar increase in 5-HT-induced IPSPs occurred, indicating that 5-HT-induced IPSPs in both cholinergic- and noncholinergic-type neurons originate from GABAergic neurons within the MSDB itself. Accordingly, GABA-type neurons in the MSDB were found to be directly excited by 5-HT. MDL 100,907, a selective 5-HT2A antagonist, blocked 5-HT-induced excitations in a majority of neurons (58%). ICS 205-930, a 5-HT3/5-HT4 antagonist, or mianserin, a nonselective 5-HT antagonist, blocked most MDL-resistant responses, indicating a role for multiple 5-HT receptor subtypes. This study also provides the first electrophysiological evidence for synaptic interactions between 5-HT-activated GABAergic neurons and cholinergic neurons and amongst GABAergic neurons in the MSDB. The implications of the findings vis-à-vis intraseptal circuitry and septohippocampal circuitry are discussed.