ACh may set the dynamics of cortical function to those appropriate for learning new information. In models of the putative associative memory function of piriform cortex, selective suppression of intrinsic but not afferent fiber synaptic transmission by ACh prevents recall of previous input from interfering with the learning of new input (Hasselmo, 1993). Selective cholinergic suppression may play a similar role in the hippocampal formation, where Schaffer collateral synapses in stratum radiatum (s. rad) may store associations between activity in region CA3 and the entorhinal cortex input to region CA1 terminating in stratum lacunosum-moleculare (s. l-m). A computational model of region CA1 predicts that for effective associative memory function of the Schaffer collaterals, cholinergic suppression of synaptic transmission should be stronger in s. rad than in s. l-m. In the hippocampal slice preparation, we tested the effect of the cholinergic agonist carbachol (0.01–500 microM) on synaptic transmission in s. rad and s. l-m. Stimulating and recording electrodes were simultaneously placed in both layers, allowing analysis of the effect of carbachol on synaptic potentials in both layers during the same perfusion in each slice. Carbachol produced a significantly stronger suppression of stimulus- evoked EPSPs in s. rad than in s. l-m at all concentrations greater than 1 microM. At 100 microM, EPSP initial slopes were suppressed by 89.1 +/- 3.0% in s. rad, but only by 40.1 +/- 4.1% in s. l-m. The muscarinic antagonist atropine (1 microM) blocked cholinergic suppression in both layers. These data support the hypothesis that synaptic modification of the Schaffer collaterals may store associations between activity in region CA3 and the afferent input to region CA1 from the entorhinal cortex. In simulations, feedback regulation of cholinergic modulation based on activity in region CA1 sets the appropriate dynamics of learning for novel associations, and recall for familiar associations.