Current antipsychotics provide symptomatic relief for patients suffering from schizophrenia and related psychoses; however, their effectiveness is variable and many patients discontinue treatment due to side effects. Although the etiology of schizophrenia is still unclear, a leading hypothesis implicates an imbalanced dopaminergic system. Muscarinic acetylcholine (ACh) receptors regulate dopamine levels in key areas of the brain involved in psychosis, with the M(4) subtype emerging as a key regulator of dopaminergic hyperactivity. Unfortunately, no selective small molecule tools exist to provide pharmacological validation of this hypothesis. Here, we describe the discovery of a small molecule modulator, LY2033298, that is highly selective for human M(4) receptors by virtue of targeting an allosteric site on this receptor. Pharmacological assays confirmed the selectivity of LY2033298 for the M(4) receptor and revealed the highest degree of positive allosteric enhancement of ACh potency thus far identified. Radioligand binding assays also show this compound to directly potentiate agonist binding while having minimal effects on antagonist binding. Mutational analysis identified a key amino acid (D(432)) in the third extracellular loop of the human M(4) receptor to be critical for selectivity and agonist potentiation by LY2033298. Importantly, LY2033298 was active in animal models predictive of clinical antipsychotic drug efficacy indicating its potential use as a first-in-class, selective, allosteric muscarinic antipsychotic agent.