The idea that astrocytes merely provide structural and trophic support for neurons has been challenged by the demonstration that astrocytes can regulate neuronal calcium levels. However, the physiological consequences of astrocyte-neuron signalling are unknown. Using mixed cultures of rat hippocampal astrocytes and neurons we have determined functional consequences of elevating astrocyte calcium levels on co-cultured neurons. Electrical or mechanical stimulation of astrocytes to increase their calcium level caused a glutamate-dependent slow inward current (SIC) in associated neurons. Microinjection of 1,2-bis(2-aminophenoxy)ethane-N,N,N',N'-tetraacetic acid (BAPTA) into astrocytes to prevent the stimulus-dependent increase in astrocyte calcium level, blocks the appearance of the neuronal SIC. Pharmacological manipulations indicate that this astrocyte-dependent SIC is mediated by extracellular glutamate acting on N-methyl-D-aspartate (NMDA) and non-NMDA glutamate receptors. Additionally, stimulation of astrocytes reduced the magnitude of action potential-evoked excitatory and inhibitory postsynaptic currents through the activation of metabotropic glutamate receptors. The demonstration that astrocytes modulate neuronal currents and synaptic transmission raises the possibility that astrocytes play a neuromodulatory role by controlling the extracellular level of glutamate.