We identified a potential novel site of action for nicotine (NIC) since (a) systemic injection of NIC led to a dose-dependent decrease in the amplitude of the sleep state-dependent, vertex-recorded, P13 midlatency auditory evoked potential (generated by the reticular activating system, RAS), (b) localized injections of a nicotinic receptor antagonist into the pedunculopontine nucleus (PPN, the cholinergic arm of the RAS) blocked the effects of systemic NIC on the P13 potential (a measure of level of arousal), and (c) localized injection of a nicotinic receptor agonist into the PPN also led to a decrease in the amplitude of the P13 potential, an effect blocked by PPN injection of a nicotinic receptor antagonist. There were minor changes in the manifestation of the startle response (SR) at the concentrations used; however, NIC did decrease the hippocampal N40 potential, although its effects were not affected by antagonist or agonist injections into the PPN. These results suggest a potential mechanism underlying the anxiolytic effects of NIC—suppression of the cholinergic arm of the RAS.