Neuronal nitric oxide synthase (nNOS) is broadly expressed in the brain and associated with synaptic plasticity through NMDAR-mediated calcium influx. However, its physiological activation and the mechanisms by which nitric oxide (NO) influences synaptic transmission have proved elusive. Here, we exploit the unique input-specificity of the calyx of Held to characterize NO modulation at this glutamatergic synapse in the auditory pathway. NO is generated in an activity-dependent manner by MNTB principal neurons receiving a calyceal synaptic input. It acts in the target neuron and adjacent inactive neurons to modulate excitability and synaptic efficacy, inhibiting postsynaptic Kv3 potassium currents (via phosphorylation), reducing EPSCs and so increasing action potential duration and reducing transmission fidelity. We conclude that NO serves as a volume transmitter and slow dynamic modulator, integrating spontaneous and evoked neuronal firing, thereby providing an index of global activity and regulating information transmission across a population of active and inactive neurons.