In terrestrial mammals the oxygen storage capacity of the central nervous system is limited and neuronal function is rapidly impaired if oxygen supply is interrupted even for a short period of time. However, oxygen tension (PO2) at the level of the peripheral (arterial) chemoreceptor is not sensitive to regional CNS differences in oxygen demands that reflect variable activity levels or local tissue hypoxia, pointing to the necessity of a functional brain oxygen sensor. Here we show that astrocytes, the most numerous brain glial cells, are highly sensitive to physiological changes in PO2. Astrocytes respond to decreases in PO2 a few mmHg below normal brain oxygenation with elevations in intracellular calcium. The hypoxia sensor of astrocytes resides in the mitochondria where oxygen is consumed. Physiological decrease in PO2 inhibits astroglial mitochondrial respiration, leading to mitochondrial depolarization, production of free radicals, lipid peroxidation, activation of phospholipase C, IP3 receptors and recruitment of Ca2+ from the intracellular stores. Hypoxia-induced [Ca2+]i increases in astrocytes trigger fusion of vesicular compartments containing ATP. Blockade of astrocytic signaling by overexpression of ATP-degrading enzymes or targeted astrocyte-specific expression of tetanus toxin (to interfere with vesicular release mechanisms) within the respiratory rhythm-generating circuits of the brainstem reveals the fundamental physiological role of astroglial oxygen sensitivity – in low oxygen conditions (environmental hypoxia) this mechanism maintains enhanced breathing even in the absence of peripheral chemoreceptor oxygen sensing. These results demonstrate that astrocytes are functionally specialized CNS oxygen sensors tuned for rapid detection of physiological changes in brain oxygenation.