Generalization formation and extinction of aversion are associated with affective disorders, but little is known about underlying mechanisms. Here, we established a novel procedure for induction of visual aversion by dynamic stripe images on digital screens in mice. We found that decreased activity of medial septum (MS) cholinergic neurons led to generalization aversion loss, but didn’t affect its extinction. We identified a new projection from MS cholinergic neurons to medial habenula (MHb), and found that inhibiting MS→MHb cholinergic circuit disrupts generalization formation, while activating this circuit damages extinction. The further studies showed that blockade of M1 mAChRs rather than α4β2 and α7 nAChRs on downstream glutamatergic neurons that corelease glutamate and acetylcholine blunted generalization enhancement and extinction deficit caused by activation of MS→MHb circuits. These findings reveal that MS→MHb cholinergic circuit modulates generalization formation and extinction of aversion, providing new insights on affective disorders such as PTSD and anxiety disorders.