Lateral habenula (LHb) neurons convey aversive and negative reward conditions through potent indirect inhibition of ventral tegmental area (VTA) dopaminergic neurons. Although the LHb and VTA reciprocally project to each other, the electrophysiological properties and the behavioral consequences associated with selective manipulations of this circuit are unknown. We found that exposure to aversive stimuli in mice increased LHb excitatory drive onto RMTg neurons. Furthermore, optogenetic activation of this pathway promoted active, passive and conditioned behavioral avoidance. Thus, activity of LHb efferents to the midbrain is aversive, but can also serve to negatively reinforce behavioral responding. Aspects of this behavioral phenotype were recapitulated by optogenetically activating lateral hypothalamic (LH) glutamatergic inputs to the LHb, suggesting that the LH may be an important upstream contributor to aversive signaling of LHb neurons. Optogenetic activation of VTA dopaminergic inputs to the LHb resulted in no detectable dopamine release in LHb brain slices. Instead, stimulation produced GABA-mediated inhibitory synaptic transmission, which suppressed the firing of postsynaptic LHb neurons in brain slices and increased the spontaneous firing rate of VTA dopaminergic neurons in vivo. Furthermore, in vivo activation of this pathway produced reward-related phenotypes that were dependent on intra-LHb GABAA receptor signaling. These results suggest that noncanonical inhibitory signaling by these hybrid dopaminergic-GABAergic neurons acts to suppress LHb output under rewarding conditions. Collectively, these data demonstrate that the LHb and midbrain interact in a reciprocal manner and implicate the VTA's projection to the LHb as a key node in the classical midbrain reward circuit.