The hippocampal circuitry undergoes attentional modulation by the cholinergic medial septum. However, it is unclear how septal activation regulates the spatial properties of hippocampal neurons. We investigated here what is the functional effect of selective-cholinergic and non-selective septal stimulation on septo-hippocampal system. We show for the first time selective activation of cholinergic cells and their differential network effect in medial septum of freely-behaving transgenic rats. Our data show that depolarization of cholinergic septal neurons evokes frequency-dependent response from the non-cholinergic septal neurons and hippocampal interneurons. Our findings provide vital evidence that cholinergic effect on septo-hippocampal axis is behavior-dependent. During the active behavioral state the activation of septal cholinergic projections is insufficient to evoke significant change in the spiking of the hippocampal neurons. The efficiency of septo-hippocampal processing during active exploration relates to the firing patterns of the non-cholinergic theta-bursting cells. Non-selective septal theta-burst stimulation resets the spiking of hippocampal theta cells, increases theta synchronization, entrains the spiking of hippocampal place cells, and tunes the spatial properties in a timing-dependent manner. The spatial properties are augmented only when the stimulation is applied in the periphery of the place field or 400-650 ms before the animals approached the center of the field. In summary, our data show that selective cholinergic activation triggers a robust network effect in the septo-hippocampal system during inactive behavioral state, whereas the non-cholinergic septal activation regulates hippocampal functional properties during explorative behavior. Together, our findings uncover fast septal modulation on hippocampal network and reveal how septal inputs up-regulate and down-regulate the encoding of spatial representation.