Synchronized neural activity is believed to be essential for many CNS functions, including neuronal development, sensory perception, and memory formation. In several brain areas GABA(A) receptor-mediated synaptic inhibition is thought to be important for the generation of synchronous network activity. We have used GABA(A) receptor beta3 subunit deficient mice (beta3-/-) to study the role of GABAergic inhibition in the generation of network oscillations in the olfactory bulb (OB) and to reveal the role of such oscillations in olfaction. The expression of functional GABA(A) receptors was drastically reduced (>93%) in beta3-/- granule cells, the local inhibitory interneurons of the OB. This was revealed by a large reduction of muscimol-evoked whole-cell current and the total current mediated by spontaneous, miniature inhibitory postsynaptic currents (mIPSCs). In beta3-/- mitral/tufted cells (principal cells), there was a two-fold increase in mIPSC amplitudes without any significant change in their kinetics or frequency. In parallel with the altered inhibition, there was a significant increase in the amplitude of theta (80% increase) and gamma (178% increase) frequency oscillations in beta3-/- OBs recorded in vivo from freely moving mice. In odor discrimination tests, we found beta3-/- mice to be initially the same as, but better with experience than beta3+/+ mice in distinguishing closely related monomolecular alcohols. However, beta3-/- mice were initially better and then worse with practice than control mice in distinguishing closely related mixtures of alcohols. Our results indicate that the disruption of GABA(A) receptor-mediated synaptic inhibition of GABAergic interneurons and the augmentation of IPSCs in principal cells result in increased network oscillations in the OB with complex effects on olfactory discrimination, which can be explained by an increase in the size or effective power of oscillating neural cell assemblies among the mitral cells of beta3-/- mice.