Neuroactive steroids are synthesized de novo in brain, yet their physiological significance remains elusive. We provide biochemical, electrophysiological, and behavioral evidence that several specific actions of alcohol (ethanol) are mediated by the neurosteroid 3α-hydroxy-5α-pregnan-20-one (3α,5α-THP; allopregnanolone). Systemic alcohol administration elevates 3α,5α-THP levels in the cerebral cortex to pharmacologically relevant concentrations. The elevation of 3α,5α-THP is dose- and time-dependent. Furthermore, there is a significant correlation between 3α,5α-THP levels in cerebral cortex and the hypnotic effect of ethanol. Blockade ofde novo biosynthesis of 5α-reduced steroids using the 5α-reductase inhibitor finasteride prevents several effects of ethanol. Pretreatment with finasteride causes no changes in baseline bicuculline-induced seizure threshold but reverses the anticonvulsant effect of ethanol. Finasteride pretreatment also reverses ethanol inhibition of spontaneous neural activity in medial septal/diagonal band of Broca neurons while having no direct effect on spontaneous firing rates. Thus, elevation of 3α,5α-THP levels by acute ethanol administration represents a novel mechanism of ethanol action as well as an important modulatory role for neurosteroids in the CNS.