1. Neuropeptide Y (NPY) produced inhibitory effects on neurons of the thalamic reticular nucleus (RT; n = 18) and adjacent ventral basal complex (VB; n = 22), which included hyperpolarization (∼4 mV), a reduction in rebound and regular spikes and an increased membrane conductance. These effects were mediated predominantly via NPY1 receptor activation of G-protein-activated, inwardly rectifying K+ (GIRK) channels. 2. NPY reduced the frequency of spontaneous GABAA receptor-mediated inhibitory post-synaptic currents (sIPSCs) in RT (by 60 ± 7%, n = 14) and VB neurons (by 25 ± 11%, n = 16), but had no effect on the kinetic properties of sIPSCs. After removal of the RT nucleus, the inhibitory effects of NPY on sIPSCs in VB neurons remained (29 ± 7%, n = 5). The synaptic effects were mediated via NPY2 receptors. 3. NPY inhibited the frequency of miniature IPSCs (mIPSCs) in RT and VB neurons (by 63 ± 7%, n = 5, and 37 ± 8%, n = 10, respectively) in the presence of tetrodotoxin (TTX) (1 μM) but not TTX (1 μM) and Cd2+ (200 μM). 4. NPY inhibited evoked IPSCs in both RT (by 18 ± 3%, n = 6) and VB (by 5 ± 4%, n = 6) neurons without change in short-term synaptic plasticity. 5. We conclude that NPY1 and NPY2 receptors are functionally segregated in the thalamus: NPY1 receptors are predominantly expressed at the somata and dendrites and directly reduce the excitability of neurons in both the RT and VB nuclei by activating GIRK channels. NPY2 receptors are located at recurrent (RT) and feed-forward GABAergic terminals (VB) and down regulate GABA release via inhibition of Ca2+ influx from voltage-gated Ca2+ channels.