Trauma can cause dysfunctional fear regulation leading some people to develop disorders, such as post-traumatic stress disorder (PTSD). The amygdala regulates fear, whereas PACAP (pituitary adenylate activating peptide) and PAC1 receptors are linked to PTSD symptom severity at genetic/epigenetic levels, with a strong link in females with PTSD. We discovered a PACAPergic projection from the basomedial amygdala (BMA) to the medial intercalated cells (mICCs) in adult mice. optogenetic stimulation of this pathway increased CFOS expression in mICCs, decreased fear recall, and increased fear extinction. Selective deletion of PAC1 receptors from the mICCs in females reduced fear acquisition, but enhanced fear generalization and reduced fear extinction in males. Optogenetic stimulation of the BMA-mICC PACAPergic pathway produced EPSCs in mICC neurons, which were enhanced by the PAC1 receptor antagonist, PACAP 6-38. Our findings show that mICCs modulate contextual fear in a dynamic and sex-dependent manner via a microcircuit containing the BMA and mICCs, and in a manner that was dependent on behavioral state. Traumatic stress can affect different aspects of fear behaviors, including fear learning, generalization of learned fear to novel contexts, how the fear of the original context is recalled, and how fear is reduced over time. While the amygdala has been studied for its role in regulation of different aspects of fear, the molecular circuitry of this structure is quite complex. In addition, aspects of fear can be modulated differently in males and females. Our findings show that a specific circuitry containing the neuropeptide PACAP and its receptor, PAC1, regulates various aspects of fear, including acquisition, generalization, recall, and extinction in a sexually dimorphic manner, characterizing a novel pathway that modulates traumatic fear.