T cell-mediated immunodestruction of pancreatic beta cells is the key process responsible for both the development of autoimmune diabetes and the induction of rejection during islet transplantation. In this study, we investigate the hypothesis that transgenic expression of an agonistic, membrane-bound single-chain anti-CTLA-4 Fv (anti-CTLA-4 scFv) on pancreatic beta cells can inhibit autoimmune processes by selectively targeting CTLA-4 on pathogenic T cells. Strikingly, transgenic expression of anti-CTLA-4 scFv on pancreatic beta cells significantly protected NOD mice from spontaneous autoimmune diabetes. Interestingly, local expression of this CTLA-4 agonist did not alter the diabetogenic properties of systemic lymphocytes, because splenocytes from transgenic mice or their nontransgenic littermates equally transferred diabetes in NOD/SCID recipients. By analyzing the T cell development in anti-CTLA-4 scFv/Th1/Th2 triple transgenic mice, we found that beta cell-specific expression of CTLA-4 agonist did not affect the development of Th1/Th2 or CD4(+)CD25(+) regulatory T cells. Most strikingly, islets from transgenic mice inhibited T cell response to immobilized anti-CD3 in a T cell-islet coculture system, suggesting a trans-mediated inhibition provided by transgenic islets. Finally, transgenic islets implanted in diabetic recipients survived much longer than did wild-type islets, indicating a therapeutic potential of this genetically modified islet graft in autoimmune diabetes.