Theta and gamma rhythms and their cross-frequency coupling play critical roles in perception, attention, learning, and memory. Available data suggest that forebrain acetylcholine (ACh) signaling promotes theta-gamma coupling, although the mechanism has not been identified. Recent evidence suggests that cholinergic signaling is both temporally and spatially constrained, in contrast to the traditional notion of slow, spatially homogeneous, and diffuse neuromodulation. Here, we find that spatially constrained cholinergic stimulation can generate theta-modulated gamma rhythms. Using biophysically-based excitatory-inhibitory (E-I) neural network models, we simulate the effects of ACh on neural excitability by varying the conductance of a muscarinic receptor-regulated K+ current. In E-I networks with local excitatory connectivity and global inhibitory connectivity, we demonstrate that theta-gamma-coupled firing patterns emerge in ACh modulated network regions. Stable gamma-modulated firing arises within regions with high ACh signaling, while theta or mixed theta-gamma activity occurs at the peripheries of these regions. High gamma activity also alternates between different high-ACh regions, at theta frequency. Our results are the first to indicate a causal role for spatially heterogenous ACh signaling in the emergence of localized theta-gamma rhythmicity. Our findings also provide novel insights into mechanisms by which ACh signaling supports the brain region-specific attentional processing of sensory information.