Nicotinic acetylcholine receptors (nAChRs) are expressed widely in the CNS, and mediate both synaptic and perisynaptic activities of endogenous cholinergic inputs and pharmacological actions of exogenous compounds (e.g., nicotine and choline). Behavioral studies indicate that nicotine improves such cognitive functions as learning and memory. However, the mechanism of nicotine's action on cognitive function remains elusive. We performed patch-clamp recordings from hippocampal CA3 pyramidal neurons to determine the effect of nicotine on mossy fiber glutamatergic synaptic transmission. We found that nicotine in combination with NS1738, an alpha 7 nAChR-positive allosteric modulator, strongly potentiated the amplitude of evoked EPSCs (eEPSCs), and reduced the EPSC paired-pulse ratio. The action of nicotine and NS1738 was mimicked by PNU-282987 (an alpha 7 nAChR agonist), and was absent in alpha 7 nAChR knock-out mice. These data indicate that activation of alpha 7 nAChRs was both necessary and sufficient to enhance the amplitude of eEPSCs. BAPTA applied postsynaptically failed to block the action of nicotine and NS1738, suggesting again a presynaptic action of the alpha 7 nAChRs. We also observed alpha 7 nAChR-mediated calcium rises at mossy fiber giant terminals, indicating the presence of functional alpha 7 nAChRs at presynaptic terminals. Furthermore, the addition of PNU-282987 enhanced action potential-dependent calcium transient at these terminals. Last, the potentiating effect of PNU-282987 on eEPSCs was abolished by inhibition of protein kinase A (PKA). Our findings indicate that activation of alpha 7 nAChRs at presynaptic sites, via a mechanism involving PKA, plays a critical role in enhancing synaptic efficiency of hippocampal mossy fiber transmission.