Numerous studies have attributed the psychopathology of anxiety and stress disorders to maladaptive behavioral responses such as an inability to extinguish fear. Therefore, understanding neural substrates of fear extinction is imperative for developing more effective therapies for anxiety and stress disorders. Although several studies indicated a role for cholinergic transmission and nicotinic acetylcholine receptors (nAChRs) in anxiety and stress disorder symptomatology, very little is known about the specific contribution of nAChRs in the fear extinction process. In the present study, we first examined the involvement of several brain regions essential for fear extinction (i.e., dorsal and ventral hippocampus, dHPC and vHPC; infralimbic, IL, and prelimbic, PL of the medial prefrontal cortex, mPFC; basolateral nucleus of the amygdala, BLA) in the impairing effects of a nAChR agonist, nicotine, on contextual fear extinction in mice. Our results showed that systemic administration of nicotine during contextual fear extinction increased c-fos expression in the vHPC and BLA while not affecting dHPC, IL or PL. In line with these results, local nicotine infusions into the vHPC, but not dHPC, resulted in impaired contextual fear extinction. Interestingly, we found that local nicotine infusions into the PL also resulted in impairment of contextual fear extinction. Second, we measured the protein levels of the GABA synthesizing enzymes GAD65 and GAD67 in the dHPC and vHPC during contextual fear extinction. Our results showed that in the group that received acute nicotine, both GAD65 and GAD67 protein levels were downregulated in the vHPC, but not in dHPC. This effect was negatively correlated with the level of freezing response during fear extinction suggesting that the downregulated GAD65/67 levels were associated with disrupted fear extinction. Finally, using c-fos/GAD65/67 double immunofluorescence, we showed that nicotine mainly increased c-fos expression in non-GABAergic ventral hippocampal cells, indicating that acute nicotine increases vHPC excitability. Overall, our results suggest that acute nicotine’s impairing effects on fear extinction is associated with ventral hippocampal disinhibition. Therefore, these results further our understanding of the interaction between nicotine addiction and anxiety and stress disorders by describing novel neural mechanisms mediating fear extinction.