Hyperpolarization-activated and cyclic nucleotide-gated (HCN) channels are expressed in dopaminergic (DA) neurons of the ventral tegmental area (VTA) as well as in DA and GABAergic neurons of the substantia nigra (SN). The excitation of DA neurons induced by ethanol has been proposed to result from its enhancing HCN channel current, I(h). Using perforated patch-clamp recordings in rat midbrain slices, we isolated I(h) in these neurons by voltage clamp. We showed that ethanol reversibly increased the amplitude and accelerated the activation kinetics of I(h) and caused a depolarizing shift in its voltage dependence. Using dynamic-clamp conductance injection, we injected artificial I(h) and fluctuating GABAergic synaptic conductance inputs into neurons following block of intrinsic I(h). This demonstrated directly a major role of I(h) in promoting rebound spiking following phasic inhibition, which was enhanced as the kinetics and amplitude of I(h) were changed in the manner induced by ethanol. Similar effects of ethanol were observed on I(h) and firing rate in non-DA, putatively GABAergic interneurons, indicating that in addition to its direct effects on firing, ethanol will produce large changes in the inhibition and disinhibition (via GABAergic interneurons) converging on DA neurons. Thus the overall effects of ethanol on firing of DA cells of the VTA and SN in vivo, and hence on phasic dopamine release in the striatum, appear to be determined substantially by its action on I(h) in both DA cells and GABAergic interneurons.