Ethanol enhances gamma-aminobutyrate (GABA) signaling in the brain, but its actions are inconsistent at GABA(A) receptors, especially at low concentrations achieved during social drinking. We postulated that the epsilon isoform of protein kinase C (PKCepsilon) regulates the ethanol sensitivity of GABA(A) receptors, as mice lacking PKCepsilon show an increased behavioral response to ethanol. Here we developed an ATP analog-sensitive PKCepsilon mutant to selectively inhibit the catalytic activity of PKCepsilon. We used this mutant and PKCepsilon(-/-) mice to determine that PKCepsilon phosphorylates gamma2 subunits at serine 327 and that reduced phosphorylation of this site enhances the actions of ethanol and benzodiazepines at alpha1beta2gamma2 receptors, which is the most abundant GABA(A) receptor subtype in the brain. Our findings indicate that PKCepsilon phosphorylation of gamma2 regulates the response of GABA(A) receptors to specific allosteric modulators, and, in particular, PKCepsilon inhibition renders these receptors sensitive to low intoxicating concentrations of ethanol.