The glutamatergic subthalamic nucleus (STN) exerts control over motor output through nuclei of the basal ganglia. High-frequency electrical stimuli in the STN effectively alleviate motor symptoms in movement disorders, and cholinergic stimulation boosts this effect. To gain knowledge about the mechanisms of cholinergic modulation in the STN, we studied cellular and circuit aspects of nicotinic acetylcholine receptors (nAChRs) in mouse STN. We discovered two largely divergent microcircuits in the STN; these are regulated in part by either α4β2 or α7 nAChRs. STN neurons containing α4β2 nAChRs (α4β2 neurons) received more glutamatergic inputs, and preferentially innervated GABAergic neurons in the substantia nigra pars reticulata. In contrast, STN neurons containing α7 nAChRs (α7 neurons) received more GABAergic inputs, and preferentially innervated dopaminergic neurons in the substantia nigra pars compacta. Interestingly, local electrical stimuli excited a majority (79%) of α4β2 neurons but exerted strong inhibition in 58% of α7 neurons, indicating an additional diversity of STN neurons: responses to electrical stimulation. Chronic exposure to nicotine selectively affects α4β2 nAChRs in STN: this treatment increased the number of α4β2 neurons, upregulated α4-containing nAChR number and sensitivity, and enhanced the basal firing rate of α4β2 neurons both ex vivo and in vivo. Thus, chronic nicotine enhances the function of the microcircuit involving α4β2 nAChRs. This indicates chronic exposure to nicotinic agonist as a potential pharmacological intervention to alter selectively the balance between these two microcircuits, and may provide a means to inhibit substantia nigra dopaminergic neurons.