Oxytocin is an important neuromodulator in the mammalian brain that increases information salience and circuit plasticity, but its signaling mechanisms and circuit effect are not fully understood. Here we report robust oxytocinergic modulation of intrinsic properties and circuit operations in hippocampal area CA2, a region of emerging importance for hippocampal function and social behavior. Upon oxytocin receptor activation, CA2 pyramidal cells depolarize and fire bursts of action potentials, a consequence of phospholipase C signaling to modify two separate voltage-dependent ionic processes. A reduction of potassium current carried by KCNQ-based M channels depolarizes the cell; protein kinase C activity attenuates spike rate of rise and overshoot, dampening after-hyperpolarizations. These actions, in concert with activation of fast-spiking interneurons, promote repetitive firing and CA2 bursting; bursting then governs short-term plasticity of CA2 synaptic transmission onto CA1 and, thus, efficacy of information transfer in the hippocampal network.