The physiological mechanisms by which anaesthetic drugs modulate oscillatory brain activity remain poorly understood. Combining human data, mathematical and computational analysis of both spiking and mean-field models, we investigated the spectral dynamics of encephalographic (EEG) beta-alpha oscillations, observed in human patients undergoing general anaesthesia. The effect of anaesthetics can be modelled as a reduction of neural fluctuation intensity, and/or an increase in inhibitory synaptic gain in the thalamo-cortical circuit. Unlike previous work, which suggested the primary importance of gamma-amino-butryic-acid (GABA) augmentation in causing a shift to low EEG frequencies, our analysis demonstrates that a non-linear transition, triggered by a simple decrease in neural fluctuation intensity, is sufficient to explain the clinically-observed appearance – and subsequent slowing – of the beta-alpha narrowband EEG peak. In our model, increased synaptic inhibition alone, did not correlate with the clinically-observed encephalographic spectral changes, but did cause the anaesthetic-induced decrease in neuronal firing rate. Taken together, our results show that such a non-linear transition results in functional fragmentation of cortical and thalamic populations; highly correlated intra-population dynamics triggered by anaesthesia decouple and isolate neural populations. Our results are able to parsimoniously unify and replicate the observed anaesthetic effects on both the EEG spectra and inter-regional connectivity, and further highlight the importance of neural activity fluctuations in the genesis of altered brain states.