Genetic variation in CHRN alpha 5, the gene encoding the alpha 5 nicotinic acetylcholine receptor subunit, increases vulnerability to tobacco addiction and lung cancer, but the underlying mechanisms are unknown. Here we report markedly increased nicotine intake in mice with a null mutation in Chrn alpha 5. This effect was 'rescued' in knockout mice by re-expressing alpha 5 subunits in the medial habenula (MHb), and recapitulated in rats through alpha 5 subunit knockdown in MHb. Remarkably, alpha 5 subunit knockdown in MHb did not alter the rewarding effects of nicotine but abolished the inhibitory effects of higher nicotine doses on brain reward systems. The MHb extends projections almost exclusively to the interpeduncular nucleus (IPN). We found diminished IPN activation in response to nicotine in alpha 5 knockout mice. Further, disruption of IPN signalling increased nicotine intake in rats. Our findings indicate that nicotine activates the habenulo-interpeduncular pathway through alpha 5-containing nAChRs, triggering an inhibitory motivational signal that acts to limit nicotine intake.