Oxytocin probably plays a role as a neurotransmitter/neuromodulator in the hippocampus of the rat. Oxytocin binding sites are present in the subiculum and CA1 region and oxytocin can excite a class of CA1 nonpyramidal neurons. In the present work we characterized the effect of oxytocin on hippocampal synaptic transmission. Whole‐cell recordings were obtained from pyramidal neurons, in conditions of nearly symmetrical chloride concentrations. The selective oxytocin receptor agonist, [Thr⁴,Gly⁷]‐oxytocin (TGOT), caused an increase in the frequency and amplitude of spontaneous inhibitory postsynaptic currents (IPSCs) in virtually all neurons. These peptide‐enhanced IPSCs were blocked by bicuculline, but not by strychnine, and reversed near 0 mV, indicating that they were mediated by γ‐aminobutyric acid (GABA)_A receptors. On average, TGOT caused a nearly threefold increase in the frequency and almost a doubling in the amplitude of spontaneous IPSCs. TGOT did not influence the frequency and the amplitude of miniature IPSCs or spontaneous excitatory postsynaptic currents (EPSCs), and had no effect on evoked IPSCs. The peptide did not affect the basic membrane properties of pyramidal neurons or their GABA sensitivity. Thus, TGOT facilitated inhibitory transmission by exerting an excitatory action on the soma and/or dendrites of GABAergic interneurons. Extracellular recordings were performed in interneurons located in various hippocampal strata. Their sensitivity to TGOT was compared to that of substance P (SP). Interneurons in stratum pyramidale were excited both by TGOT and by SP. By contrast, stratum radiatum interneurons responded to SP but not to TGOT. In stratum oriens, half of the interneurons responded to SP, but only a minority to TGOT. Thus, oxytocin‐responsive interneurons appear to be preferentially located in close vicinity of pyramidal neurons.