The T cell marker CD26/dipeptidyl peptidase (DP) IV is associated with an effector phenotype and markedly elevated in the human CNS disorder multiple sclerosis. However, little is known about the in vivo role of CD26/DP IV in health and disease, and the underlying mechanism of its function in CNS inflammation. To directly address the role of CD26/DP IV in vivo, we examined Th1 immune responses and susceptibility to experimental autoimmune encephalomyelitis in CD26(-/-) mice. We show that gene deletion of CD26 in mice leads to deregulation of Th1 immune responses. Although production of IFN-gamma and TNF-alpha by pathogenic T cells in response to myelin Ag was enhanced in CD26(-/-) mice, production of the immunosuppressive cytokine TGF-beta1 was diminished in vivo and in vitro. In contrast to the reduction in TGF-beta1 production, responsiveness to external TGF-beta1 was normal in T cells from CD26(-/-) mice, excluding alterations in TGF-beta1 sensitivity as a mechanism causing the loss of immune regulation. Natural ligands of CD26/DP IV induced TGF-beta1 production in T cells from wild-type mice. However, natural ligands of CD26/DP IV failed to elicit TGF-beta1 production in T cells from CD26(-/-) mice. The striking functional deregulation of Th1 immunity was also seen in vivo. Thus, clinical experimental autoimmune encephalomyelitis scores were significantly increased in CD26(-/-) mice immunized with peptide from myelin oligodendrocyte glycoprotein. These results identify CD26/DP IV as a nonredundant inhibitory receptor controlling T cell activation and Th1-mediated autoimmunity, and may have important therapeutic implications for the treatment of autoimmune CNS disease.