Recently, the medial habenula-interpeduncular (MHb-IPN) axis has been hypothesized to modulate anxiety although neuronal populations and molecular mechanisms regulating affective behaviors in this circuit are unknown. Here we show that MHb cholinergic neuron activity directly regulates anxiety-like behavior. Optogenetic silencing of MHb cholinergic IPN inputs reduced anxiety-like behavior in mice. MHb cholinergic neurons are unique in that they robustly express neuronal nicotinic acetylcholine receptors (nAChRs), although their role as autoreceptors in these neurons has not been described. nAChRs are ligand-gated cation channels that are activated by the excitatory neurotransmitter, acetylcholine (ACh), as well as nicotine, the addictive component of tobacco smoke. We expressed novel nAChR subunits that render nAChRs hypersensitive to ACh, ACh detectors, selectively in MHb cholinergic neurons of adult mice. Mice expressing these ACh detectors exhibited increased baseline anxiety-like behavior that was alleviated by blocking the mutant receptors. Under stressful conditions, such as during nicotine withdrawal, nAChRs were functionally upregulated in MHb cholinergic neurons mediating an increase in anxiety-like behavior. Together, these data indicate that MHb cholinergic neurons regulate anxiety via signaling through nicotinic autoreceptors and point toward nAChRs in MHb as molecular targets for novel anxiolytic therapeutics.