Several lines of evidence suggest a link between the alpha7 neuronal nicotinic acetylcholine receptor (nAChR) and brain disorders including schizophrenia, Alzheimer's disease, and traumatic brain injury. The present work describes a novel molecule, 1-(5-chloro-2,4-dimethoxy-phenyl)-3-(5-methyl-isoxazol-3-yl)-urea (PNU-120596), which acts as a powerful positive allosteric modulator of the alpha7 nAChR. Discovered in a high-throughput screen, PNU-120596 increased agonist-evoked calcium flux mediated by an engineered variant of the human alpha7 nAChR. Electrophysiology studies confirmed that PNU-120596 increased peak agonist-evoked currents mediated by wild-type receptors and also demonstrated a pronounced prolongation of the evoked response in the continued presence of agonist. In contrast, PNU-120596 produced no detectable change in currents mediated by alpha4beta2, alpha3beta4, and alpha9alpha10 nAChRs. PNU-120596 increased the channel mean open time of alpha7 nAChRs but had no effect on ion selectivity and relatively little, if any, effect on unitary conductance. When applied to acute hippocampal slices, PNU-120596 increased the frequency of ACh-evoked GABAergic postsynaptic currents measured in pyramidal neurons; this effect was suppressed by TTX, suggesting that PNU-120596 modulated the function of alpha7 nAChRs located on the somatodendritic membrane of hippocampal interneurons. Accordingly, PNU-120596 greatly enhanced the ACh-evoked inward currents in these interneurons. Systemic administration of PNU-120596 to rats improved the auditory gating deficit caused by amphetamine, a model proposed to reflect a circuit level disturbance associated with schizophrenia. Together, these results suggest that PNU-120596 represents a new class of molecule that enhances alpha7 nAChR function and thus has the potential to treat psychiatric and neurological disorders.