The hypothalamic-pituitary-adrenal (HPA) axis, which mediates the body's response to stress, is largely under GABAergic control. Here we demonstrate that corticotropin-releasing hormone (CRH) neurons are modulated by the stress-derived neurosteroid, tetrahydrodeoxycorticosterone (THDOC), acting on subunit-containing GABAA receptors (GABAARs). Under normal conditions, THDOC potentiates the inhibitory effects of GABA on CRH neurons, decreasing the activity of the HPA axis. Counterintuitively, following stress, THDOC activates the HPA axis due to dephosphorylation of KCC2 residue Ser940, resulting in a collapse of the chloride gradient and excitatory GABAergic transmission. The effects of THDOC on CRH neurons are mediated by actions on GABAAR subunit-containing receptors since these effects are abolished in Gabrd–/– mice under both control and stress conditions. Interestingly, blocking neurosteroidogenesis with finasteride is sufficient to block the stress-induced elevations in corticosterone and prevent stress-induced anxiety-like behaviors in mice. These data demonstrate that positive feedback of neurosteroids onto CRH neurons is required to mount the physiological response to stress. Further, GABAAR subunit-containing receptors and phosphorylation of KCC2 residue Ser940 may be novel targets for control of the stress response, which has therapeutic potential for numerous disorders associated with hyperexcitability of the HPA axis, including Cushing's syndrome, epilepsy, and major depression.