Synaptic inhibition in the olfactory bulb (OB), the first relay station of olfactory information, is believed to be important for odour discrimination. We interfered with GABAergic inhibition of mitral and tufted cells (M/T cells), the principal neurons of the OB, by disrupting their potassium-chloride cotransporter 2 (Kcc2). Roughly, 70% of mice died around 3 weeks, but surviving mice appeared normal. In these mice, the resulting increase in the intracellular Cl(-) concentration nearly abolished GABA-induced hyperpolarization of mitral cells (MCs) and unexpectedly increased the number of perisomatic synapses on MCs. In vivo analysis of odorant-induced OB electrical activity revealed increased M/T cell firing rate, altered phasing of action potentials in the breath cycle and disrupted separation of odour-induced M/T cell activity patterns. Mice also demonstrated a severely impaired ability to discriminate chemically similar odorants or odorant mixtures. Our work suggests that precisely tuned GABAergic inhibition onto M/T cells is crucial for M/T cell spike pattern separation needed to distinguish closely similar odours.