The mechanisms through which volatile general anaesthetics exert their behavioural effects remain unclear. The accessibility of the Drosophila larval neuromuscular junction to genetic and neurophysiological analysis has made it an attractive model system for identification of anaesthetic targets. This study provides a mechanistic basis for the genetic analysis of anaesthetic action, by analysing the neurophysiological effects of the volatile anaesthetic isoflurane on axonal and synaptic function in the Drosophila larva. The most robust effect of isoflurane was a reversible decrease in the amplitude and area of glutamatergic excitatory junctional currents (EJCs) evoked at the neuromuscular junction. Isoflurane did not affect postsynaptic glutamate receptor function detectably, in that the amplitudes, areas and decay times of spontaneous miniature EJCs were unchanged at any concentration. Therefore, decreased EJC amplitude resulted from reduction of neurotransmitter release. Reduced neurotransmitter release was associated with decreased presynaptic excitability, measured as increased delay to EJC onset and reduced axonal conduction velocity. EJC amplitude was rescued to control levels by direct electrotonic stimulation of the synapse in the presence of tetrodotoxin, indicating that isoflurane inhibits neurotransmitter release by reducing presynaptic excitability. In addition, isoflurane reduced release probability, measured as increased paired-pulse facilitation. The EC50 for suppression of larval locomotion was similar to that for reduction of transmitter release, indicating that the axonal and synaptic effects were occurring in a behaviourally-relevant range. These results provide a cellular context for ongoing genetic and neurophysiological analyses of volatile anaesthetic action in Drosophila, and suggest candidate anesthetic target molecules.