Higher cognitive function depends on accurate detection and processing of subtle features of sensory stimuli. Such precise computations require neural circuits to be modulated over rapid timescales, yet this modulation is poorly understood. Brain-derived steroids (neurosteroids) can act as fast signaling molecules in the vertebrate central nervous system and could therefore modulate sensory processing and guide behavior, but there is no empirical evidence for this possibility. Here we report that acute inhibition of estrogen production within a cortical-like region involved in complex auditory processing disrupts a songbird's ability to behaviorally respond to song stimuli. Identical manipulation of local estrogen levels rapidly changes burst firing of single auditory neurons. This acute estrogen-mediated modulation targets song and not other auditory stimuli, possibly enabling discrimination among species-specific signals. Our results demonstrate a crucial role for neuroestrogen synthesis among vertebrates for enhanced sensory encoding. Cognitive impairments associated with estrogen depletion, including verbal memory loss in humans, may therefore stem from compromised moment-by-moment estrogen actions in higher-order cortical circuits.