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Forming distinct representations of multiple contexts, places and episodes is a crucial function of the hippocampus. The dentate gyrus subregion has been suggested to fulfill this role. We have tested this hypothesis by generating and analyzing a mouse strain that lacks the gene encoding the essential subunit of the N-methyl-D-aspartate (NMDA) receptor, NR1, specifically in dentate gyrus granule cells. The mutant mice performed normally in contextual fear conditioning, but were impaired in the ability to distinguish two similar contexts. A significant reduction in the context-specific modulation of firing rate was observed in the CA3 pyramidal cells when the mutant mice were transferred from one context to another. These results provide evidence that NMDA receptors in the granule cells of the dentate gyrus play a crucial role in the process of pattern separation.