Augmentation of nicotinic alpha7 receptor function is considered to be a potential therapeutic strategy aimed at ameliorating cognitive and mnemonic dysfunction in relation to debilitating pathological conditions, such as Alzheimer's disease and schizophrenia. In the present report, a novel positive allosteric modulator of the alpha7 nicotinic acetylcholine receptor (nAChR), 1-(5-chloro-2-hydroxy-phenyl)-3-(2-chloro-5-trifluoromethyl-phenyl)-urea (NS1738), is described. NS1738 was unable to displace or affect radioligand binding to the agonist binding site of nicotinic receptors, and it was devoid of effect when applied alone in electrophysiological paradigms. However, when applied in the presence of acetylcholine (ACh), NS1738 produced a marked increase in the current flowing through alpha7 nAChRs, as determined in both oocyte electrophysiology and patch-clamp recordings from mammalian cells. NS1738 acted by increasing the peak amplitude of ACh-evoked currents at all concentrations; thus, it increased the maximal efficacy of ACh. Oocyte experiments indicated an increase in ACh potency as well. NS1738 had only marginal effects on the desensitization kinetics of alpha7 nAChRs, as determined from patch-clamp studies of both transfected cells and cultured hippocampal neurons. NS1738 was modestly brain-penetrant, and it was demonstrated to counteract a (-)-scopolamine-induced deficit in acquisition of a water-maze learning task in rats. Moreover, NS1738 improved performance in the rat social recognition test to the same extent as (-)-nicotine, demonstrating that NS1738 is capable of producing cognitive enhancement in vivo. These data support the notion that alpha7 nAChR allosteric modulation may constitute a novel pharmacological principle for the treatment of cognitive dysfunction.