Several lines of evidence suggest a link between the alpha 7 neuronal nicotinic acetylcholine receptor ( nAChR) and brain disorders including schizophrenia, Alzheimer's disease, and traumatic brain injury. The present work describes a novel molecule, 1-(5-chloro-2,4-dimethoxy-phenyl)- 3-(5-methyl-isoxazol-3-yl)-urea (PNU-120596), which acts as a powerful positive allosteric modulator of the alpha 7 nAChR. Discovered in a high-throughput screen, PNU-120596 increased agonist-evoked calcium flux mediated by an engineered variant of the human alpha 7 nAChR. Electrophysiology studies confirmed that PNU-120596 increased peak agonist-evoked currents mediated by wild-type receptors and also demonstrated a pronounced prolongation of the evoked response in the continued presence of agonist. In contrast, PNU-120596 produced no detectable change in currents mediated by alpha 4 beta 2, beta 3 beta 4, and alpha 9 alpha 10 nAChRs. PNU-120596 increased the channel mean open time of alpha 7 nAChRs but had no effect on ion selectivity and relatively little, if any, effect on unitary conductance. When applied to acute hippocampal slices, PNU-120596 increased the frequency of ACh-evoked GABAergic postsynaptic currents measured in pyramidal neurons; this effect was suppressed by TTX, suggesting that PNU-120596 modulated the function of alpha 7 nAChRs located on the somatodendritic membrane of hippocampal interneurons. Accordingly, PNU-120596 greatly enhanced the ACh-evoked inward currents in these interneurons. Systemic administration of PNU-120596 to rats improved the auditory gating deficit caused by amphetamine, a model proposed to reflect a circuit level disturbance associated with schizophrenia. Together, these results suggest that PNU-120596 represents a new class of molecule that enhances alpha 7 nAChR function and thus has the potential to treat psychiatric and neurological disorders.