Whole-cell and extracellular recording techniques were used to examine local circuit inhibition in the CA1 region of the rat hippocampus in vitro. Activation, primarily of the recurrent inhibitory circuit by alvear stimulation, elicited an IPSP in pyramidal neurons that was dependent, in part, on NMDA receptor activation. Application of a tetanizing stimulus to the alveus evoked long-term potentiation (LTP) of the intracellularly recorded recurrent IPSPs. This LTP also was NMDA- dependent and was more sensitive to blockade by the NMDA antagonists 2- amino-5-phosphonovalerate (APV) and N-acetyl-aspartyl-glutamate, than the excitatory LTP produced by Schaffer collateral stimulation. With regard to APV, the sensitivity of inhibitory LTP was an order of magnitude greater. A biophysical simulation of hippocampal CA1 circuitry was used in a model of learned pattern recognition that included LTP in both excitatory and inhibitory recurrent circuits. In this model, selective blockade of inhibitory LTP produced aberrant spread of lateral excitation, resulting in confusion of normally distinguishable patterns of neuronal activity. Consideration is given to the possibility that selective disruption of NMDA-dependent modulation of local circuit inhibition may serve as a model for some aspects of dysfunction associated with NMDA-antagonist exposure and schizophrenia.