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Animals exhibit a behavioral response to novel sensory stimuli about which they have no prior knowledge. We have examined the neural and behavioral correlates of novelty and familiarity in the olfactory system of Drosophila. Novel odors elicit strong activity in output neurons (MBONs) of the α'3 compartment of the mushroom body that is rapidly suppressed upon repeated exposure to the same odor. This transition in neural activity upon familiarization requires odor-evoked activity in the dopaminergic neuron innervating this compartment. Moreover, exposure of a fly to novel odors evokes an alerting response that can also be elicited by optogenetic activation of α'3 MBONs. Silencing these MBONs eliminates the alerting behavior. These data suggest that the α'3 compartment plays a causal role in the behavioral response to novel and familiar stimuli as a consequence of dopamine-mediated plasticity at the Kenyon cell-MBONα'3 synapse.