Acetylcholine is vital for cognitive functions of the brain. Although its actions in the individual cell are known in some detail, its effects at the network level are poorly understood. The hippocampus, which receives a major cholinergic input from the medial septum/diagonal band, is important in memory and exhibits network activity at 40 Hz during relevant behaviours. Here we show that cholinergic activation is sufficient to induce 40-Hz network oscillations in the hippocampus in vitro. Oscillatory activity is generated spontaneously in the CA3 subfield and can persist for hours. During the oscillatory state, principal neurons fire action potentials that are phase-related to the extracellular oscillation, but each neuron fires in only a small proportion of the cycles. Both excitatory and inhibitory synaptic events participate during the network oscillation in a precise temporal pattern. These results indicate that subcortical cholinergic input can control hippocampal memory processing by inducing fast network oscillations.