Dysregulated cholinergic neurotransmission has been implicated in the pathophysiology of schizophrenia, particularly negative symptoms and cognitive deficits. The aim of the present study was to evaluate the role of neocortical cholinergic innervation and of the N-methyl-d-aspartate (NMDA) receptor antagonist phencyclidine (PCP) on social interaction and novel object recognition (NOR), a declarative memory task. The cholinergic corticopetal projection was lesioned by local infusion of the immunotoxin 192 IgG-saporin into nucleus basalis magnocellularis of adult male Lister hooded rats. Behavior was assessed 2.5 weeks later in a social interaction paradigm followed by the NOR task. We found that selective cholinergic denervation of neocortex led to a significant reduction in duration of social interaction, specifically active social interaction. Acute administration of PCP (1.0 mg/kg, s.c.) caused a marked decrease of active social interaction, such that there was no longer a difference between intact and denervated animals. Neither cholinergic denervation alone, nor PCP (1.0 mg/kg, s.c.) alone blocked the ability of rats to recognize a novel object. However, when animals lacking cortical cholinergic innervation were challenged by PCP, they were no longer able to recognize a novel object. This study indicates that rats lacking cholinergic innervation of neocortex have impaired social interaction and specifically that the duration of active contact is shortened. Animals with severe cortical cholinergic hypofunction maintain the ability to perform in a declarative memory test, although the task is carried out less intensively. However, a provocation of psychosis-like behavior by a dose of PCP that does not by itself impair performance in normal animals, will abolish the ability to recognize novel objects in animals lacking cortical cholinergic innervation. The present findings support a possible role for cortical cholinergic hypofunction in the negative and cognitive symptoms of schizophrenia, and the potential for cholinergic augmentation as part of the pharmacological profile of antipsychotic drugs.