Interferon (IFN)-gamma, the main cytokine responsible for immunological defense against Toxoplasma gondii, is essential in all infected tissues, including the central nervous system. However, IFN-gamma-activated microglia may cause tissue injury through production of toxic metabolites such as nitric oxide (NO), a potent inducer of central nervous system pathologies related to inflammatory neuronal disturbances. Despite potential NO toxicity, neurodegeneration is not commonly found during chronic T. gondii infection. In this study, we describe decreased NO production by IFN-gamma-activated microglial cells infected by T. gondii. This effect involved strong inhibition of iNOS expression in IFN-gamma-activated, infected microglia but not in uninfected neighboring cells. The inhibition of NO production and iNOS expression were parallel with recovery of neurite outgrowth when neurons were co-cultured with T. gondii-infected, IFN-gamma-activated microglia. In the presence of transforming growth factor (TGF)-beta1-neutralizing antibodies, the beneficial effect of the parasite on neurons was abrogated, and NO production reverted to levels similar to IFN-gamma-activated uninfected co-cultures. In addition, we observed Smad-2 nuclear translocation, a hallmark of TGF-beta1 downstream signaling, in infected microglial cultures, emphasizing an autocrine effect restricted to infected cells. Together, these data may explain a neuropreservation pattern observed during immunocompetent host infection that is dependent on T. gondii-triggered TGF-beta1 secretion by infected microglia.