During non-rapid eye movement (NREM) sleep, synchronous synaptic activity in the thalamocortical network generates predominantly low-frequency oscillations (<4 Hz) that are modulated by inhibitory inputs from the thalamic reticular nucleus (TRN). Whether TRN cells integrate sleep-wake signals from subcortical circuits remains unclear. We found that GABA neurons from the lateral hypothalamus (LHGABA) exert a strong inhibitory control over TRN GABA neurons (TRNGABA). We found that optogenetic activation of this circuit recapitulated state-dependent changes of TRN neuron activity in behaving mice and induced rapid arousal during NREM, but not REM, sleep. During deep anesthesia, activation of this circuit induced sustained cortical arousal. In contrast, optogenetic silencing of LHGABA-TRNGABA transmission increased the duration of NREM sleep and amplitude of delta (1-4 Hz) oscillations. Collectively, these results demonstrate that TRN cells integrate subcortical arousal inputs selectively during NREM sleep and may participate in sleep intensity.