Survival of animals is dependent on the correct selection of an appropriate behavioral response to competing external stimuli. Theoretical models have been proposed and underlying mechanisms are emerging to explain how one circuit is selected among competing neural circuits. The evolutionarily conserved forebrain to midbrain habenulo-interpeduncular nucleus (Hb-IPN) pathway consists of cholinergic and non-cholinergic neurons, which mediate different aversive behaviors. Simultaneous calcium imaging of neuronal cell bodies and of the population dynamics of their axon terminals reveals that signals in the cell bodies are not reflective of terminal activity. We find that axon terminals of cholinergic and non-cholinergic habenular neurons exhibit stereotypic patterns of spontaneous activity that are negatively correlated and localize to discrete subregions of the target IPN. Patch-clamp recordings show that calcium bursts in cholinergic terminals at the ventral IPN trigger excitatory currents in IPN neurons, which precede inhibition of non-cholinergic terminals at the adjacent dorsal IPN. Inhibition is mediated through presynaptic GABA B receptors activated in noncholinergic habenular neurons upon GABA release from the target IPN. Together, the results reveal a hardwired mode of competition at the terminals of two excitatory neuronal populations, providing a physiological framework to explore the relationship between different aversive responses.