Loss of synaptic inhibition by γ-aminobutyric acid and glycine due to potassium chloride cotransporter-2 (KCC2) down-regulation in the spinal cord is a critical mechanism of synaptic plasticity in neuropathic pain. Here we present novel evidence that peripheral nerve injury diminishes glycine-mediated inhibition and induces a depolarizing shift in the reversal potential of glycine-mediated currents (E(glycine)) in spinal dorsal horn neurons. Blocking glutamate N-methyl-D-aspartate (NMDA) receptors normalizes synaptic inhibition, E(glycine), and KCC2 by nerve injury. Strikingly, nerve injury increases calcium-dependent calpain activity in the spinal cord that in turn causes KCC2 cleavage at the C terminus. Inhibiting calpain blocks KCC2 cleavage induced by nerve injury and NMDA, thereby normalizing E(glycine). Furthermore, calpain inhibition or silencing of μ-calpain at the spinal level reduces neuropathic pain. Thus, nerve injury promotes proteolytic cleavage of KCC2 through NMDA receptor-calpain activation, resulting in disruption of chloride homeostasis and diminished synaptic inhibition in the spinal cord. Targeting calpain may represent a new strategy for restoring KCC2 levels and tonic synaptic inhibition and for treating chronic neuropathic pain.