We investigated the role of acetylcholine (ACh) during encoding and retrieval of tone/shock-induced fear conditioning with the aim of testing Hasselmo's cholinergic modulation model of encoding and retrieval using a task sensitive to hippocampal disruption. Lesions of the hippocampus impair acquisition and retention of contextual conditioning with no effect on tone conditioning. Cholinergic antagonists also impair acquisition of contextual conditioning. Saline, scopolamine, or physostigmine was administered directly into the CA3 subregion of the hippocampus 10 min before rats were trained on a tone/shock-induced fear conditioning paradigm. Freezing behavior was used as the measure of learning. The scopolamine group froze significantly less during acquisition to the context relative to controls. The scopolamine group also froze less to the context test administered 24 h posttraining. A finer analysis of the data revealed that scopolamine disrupted encoding but not retrieval. The physostigmine group initially froze less during acquisition to the context, although this was not significantly different from controls. During the context test, the physostigmine group froze less initially but quickly matched the freezing levels of controls. A finer analysis of the data indicated that physostigmine disrupted retrieval but not encoding. These results suggest that increased ACh levels are necessary for encoding new spatial contexts, whereas decreased ACh levels are necessary for retrieving previously learned spatial contexts. (Contains 6 figures.)