Genetic variation in CHRNA5, the gene encoding the α5 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 Chrna5. This effect was 'rescued' in knockout mice by re-expressing α5 subunits in the medial habenula (MHb), and recapitulated in rats through α5 subunit knockdown in MHb. Remarkably, α5 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 α5 knockout mice. Further, disruption of IPN signalling increased nicotine intake in rats. Our findings indicate that nicotine activates the habenulo-interpeduncular pathway through α5-containing nAChRs, triggering an inhibitory motivational signal that acts to limit nicotine intake.