Grid cells in layer II of the medial entorhinal cortex form a principal component of the mammalian neural representation of space. The firing pattern of a single grid cell has been hypothesized to be generated through attractor dynamics in a network with a specific local connectivity including both excitatory and inhibitory connections. However, experimental evidence supporting the presence of such connectivity among grid cells in layer II is limited. Here we report recordings from more than 600 neuron pairs in rat entorhinal slices, demonstrating that stellate cells, the principal cell type in the layer II grid network, are mainly interconnected via inhibitory interneurons. Using a model attractor network, we demonstrate that stable grid firing can emerge from a simple recurrent inhibitory network. Our findings thus suggest that the observed inhibitory microcircuitry between stellate cells is sufficient to generate grid-cell firing patterns in layer II of the medial entorhinal cortex.