Ethanol's aversive property may limit it's use, but the underlying mechanisms are no well-understood. Emerging evidence suggests a critical role for the lateral habenula (LHb) in the aversive response to various drugs, including ethanol. We previously showed that ethanol enhances glutamatergic transmission and stimulates LHb neurons. GABAergic transmission, a major target of ethanol in many brain regions, also tightly regulates LHb activity. This study assessed the action of ethanol on LHb GABAergic transmission in rat brain slices. Application of ethanol accelerated spontaneous action potential firing of LHb neurons, and LHb activity was increased by the GABA receptor antagonist gabazine, and ethanol-induced acceleration of LHb firing was further increased by gabazine. Additionally, ethanol potentiated GABAergic transmission (inhibitory postsynaptic currents, IPSCs) with an EC of 1.5 mM. Ethanol-induced potentiation of IPSCs was increased by a GABA receptor antagonist; it was mimicked by dopamine, dopamine receptor agonists, and dopamine reuptake blocker, and was completely prevented by reserpine, which depletes store of catecholamine. Moreover, ethanol-induced potentiation of IPSCs involved cAMP signaling. Finally, ethanol enhanced simultaneously glutamatergic and GABAergic transmissions to the majority of LHb neurons: the potentiation of the former being greater than that of the latter, the net effect was increased firing. Since LHb excitation may contribute to aversion, ethanol-induced potentiation of GABAergic inhibition tends to reduce aversion.