The brain's ability to associate threats with external stimuli is vital to execute essential behaviours including avoidance. Disruption of this process contributes instead to the emergence of pathological traits which are common in addiction and depression. However, the mechanisms and neural dynamics at the single-cell resolution underlying the encoding of associative learning remain elusive. Here, employing a Pavlovian discrimination task in mice we investigate how neuronal populations in the lateral habenula (LHb), a subcortical nucleus whose excitation underlies negative affect, encode the association between conditioned stimuli and a punishment (unconditioned stimulus). Large population single-unit recordings in the LHb reveal both excitatory and inhibitory responses to aversive stimuli. Additionally, local optical inhibition prevents the formation of cue discrimination during associative learning, demonstrating a critical role of LHb activity in this process. Accordingly, longitudinal in vivo two-photon imaging tracking LHb calcium neuronal dynamics during conditioning reveals an upward or downward shift of individual neurons' CS-evoked responses. While recordings in acute slices indicate strengthening of synaptic excitation after conditioning, support vector machine algorithms suggest that postsynaptic dynamics to punishment-predictive cues represent behavioral cue discrimination. To examine the presynaptic signaling in LHb participating in learning we monitored neurotransmitter dynamics with genetically-encoded indicators in behaving mice. While glutamate, GABA, and serotonin release in LHb remain stable across associative learning, we observe enhanced acetylcholine signaling developing throughout conditioning. In summary, converging presynaptic and postsynaptic mechanisms in the LHb underlie the transformation of neutral cues in valued signals supporting cue discrimination during learning.