Abstract: Acetylcholine release in the hippocampus plays a central role in the formation of new memory representations. An influential but largely untested theory proposes that memory formation requires acetylcholine to enhance responses in CA1 to new sensory information from entorhinal cortex whilst depressing inputs from previously encoded representations in CA3. Here, we show that excitatory inputs from entorhinal cortex and CA3 are depressed equally by synaptic release of acetylcholine in CA1. However, feedforward inhibition from entorhinal cortex exhibits greater depression than CA3 resulting in a selective enhancement of excitatory-inhibitory balance and CA1 activation by entorhinal inputs. Entorhinal and CA3 pathways engage different feedforward interneuron subpopulations and cholinergic modulation of presynaptic function is mediated differentially by muscarinic M3 and M4 receptors, respectively. Thus, our data support a role and mechanisms for acetylcholine to prioritise novel information inputs to CA1 during memory formation.