Balance between cholinergic and dopaminergic signaling is central to striatal control of movement and cognition. In dystonia, a common disorder of movement, anticholinergic therapy is often beneficial. This observation suggests there is a pathological increase in cholinergic tone, yet direct confirmation is lacking. In DYT1, an early-onset genetic form of dystonia caused by a mutation in the protein torsinA (TorA), the suspected heightened cholinergic tone is commonly attributed to faulty dopamine D2 receptor (D2R) signaling where D2R agonists cause excitation of striatal cholinergic interneurons (ChIs), rather than the normal inhibition of firing observed in wild-type animals, an effect known as “paradoxical excitation”. Here, we provide for the first time direct measurement of elevated striatal extracellular acetylcholine (ACh) in a knock-in mouse model of human DYT1 dystonia (TorAΔE/+ mice), confirming a striatal hypercholinergic state. We hypothesized that this elevated extracellular ACh might cause chronic over-activation of muscarinic acetylcholine receptors (mAChRs) and disrupt normal D2R function due to their shared coupling to Gi/o-proteins. We tested this concept in vitro first using a broad-spectrum mAChR antagonist, and then using a M2/M4 mAChR selective antagonist to specifically target mAChRs expressed by ChIs. Remarkably, we found that mAChR inhibition reverses the D2R-mediated paradoxical excitation of ChIs recorded in slices from TorAΔE/+ mice to a typical inhibitory response. Furthermore, we recapitulated the paradoxical D2R excitation of ChIs in striatal slices from wild-type mice within minutes by simply increasing cholinergic tone through pharmacological inhibition of acetylcholinesterase (AChE) or by prolonged agonist activation of mAChRs. Collectively, these results show that enhanced mAChR tone itself is sufficient to rapidly reverse the polarity of D2R regulation of ChI excitability, correcting the previous notion that the D2R mediated paradoxical ChI excitation causes the hypercholinergic state in dystonia. Further, using a combination of genetic and pharmacological approaches, we found evidence that this switch in D2R polarity results from a change in coupling from the preferred Gi/o pathway to non-canonical β-arrestin signaling. These results highlight the need to fully understand how the mutation in TorA leads to pathologically heightened extracellular ACh. Furthermore the discovery of this novel ACh-dopamine interaction and the participation of β-arrestin in regulation of cholinergic interneurons is likely important for other basal ganglia disorders characterized by perturbation of ACh-dopamine balance, including Parkinson and Huntington diseases, l-DOPA-induced dyskinesia and schizophrenia.