The granule cell population response to perforant path stimulation decreased significantly within seconds following release of endogenous dynorphin from dentate granule cells. The depression was blocked by the opioid receptor antagonists naloxone and norbinaltorphimine, suggesting that the effect was mediated by dynorphin activation of kappa 1 type opioid receptors. Pharmacological application of dynorphin B in the molecular layer was effective at reducing excitatory synaptic transmission from the perforant path, but application in the hilus had no significant effect. These results suggest that endogenous dynorphin peptides may be released from a local source within the dentate molecular layer. By light microscopy, dynorphin-like immunoreactivity (dynorphin-LI) was primarily found in granule cell axons in the hilus and stratum lucidum with only a few scattered fibers evident in the molecular layer. At the extreme ventral pole of the hippocampus, a diffuse band of varicose processes was also seen in the molecular layer, but this band was not present in more dorsal sections similar to those used for the electrophysiological studies. Electron microscopic analysis of the molecular layer midway along the septotemporal axis revealed that dynorphin-LI was present in dense-core vesicles in both spiny dendrites and unmyelinated axons with the majority (74%) of the dynorphin-LI-containing dense-core vesicles found in dendrites. Neuronal processes containing dynorphin-LI were observed throughout the molecular layer. The results suggest that dynorphin release from granule cell processes in the molecular layer regulates excitatory inputs entering the hippocampus from cerebral cortex, thus potentially counteracting such excitation-induced phenomena as epileptogenesis or long-term potentiation.