The drug addiction process shares many commonalities with normal learning and memory. Addictive drugs subvert normal synaptic plasticity mechanisms, and the consequent synaptic changes underlie long-lasting modifications in behavior that accrue during the progression from drug use to addiction. Supporting this hypothesis, it was recently shown that nicotine administered to freely moving mice induces long-term synaptic potentiation of the perforant path connection to granule cells of the dentate gyrus. The perforant path carries place and spatial information that links the environment to drug taking. An example of that association is the nicotine-induced synaptic potentiation of the perforant path that was found to underlie nicotine-conditioned place preference. The present study examines the influence of nicotine over local GABAergic inhibition within the dentate gyrus during the drug-induced synaptic potentiation. In vivo recordings from freely moving mice suggested that both feedforward and feedback inhibition onto granules cells were diminished by nicotine during the induction of synaptic potentiation. In vitro brain slice studies indicated that nicotine altered local circuit inhibition within the dentate gyrus leading to disinhibition of granule cells. These changes in local inhibition contributed to nicotine-induced in vivo synaptic potentiation, thus, likely contributed to drug-associated memories. Through this learning process, environmental features become cues that motivate conditioned drug-seeking and drug-taking behaviors.