CTLA-4-mediated inhibition of T cell activation may be accomplished by competition for ligands and/or by signals mediated through the intracellular domain. Studies have implicated Tyr201 in the cytoplasmic domain of CTLA-4 in regulating CTLA-4 signal transduction and intracellular trafficking. To investigate the mechanism of CTLA-4 function in vivo, transgenes encoding wild-type CTLA-4 (FL), a mutant lacking the cytoplasmic domain of CTLA-4 (DeltaCTLA-4 tail), or a CTLA-4 Tyr201 mutant (Y201V) were introduced into CTLA-4-deficient mice. CTLA-4-/- mice display an autoimmune lymphoproliferative disorder resulting in tissue destruction and early death. When either the FL or the Y201V transgene was bred into CTLA-4-/- animals, a complete rescue from lymphoproliferation and autoimmunity was observed. In contrast, CTLA-4-/- mice expressing the DeltaCTLA-4 tail transgene were long lived with no evidence of multiorgan lymphocytic infiltration, but exhibited lymphadenopathy and accumulated large numbers of activated T cells. Furthermore, these animals displayed a Th2-biased phenotype which conferred susceptibility to Leishmania infection. These results indicate that the inhibitory effect of CTLA-4 is mediated in part through the ability of the extracellular domain to compete for ligands. The cytoplasmic domain of CTLA-4, however, is required for complete inhibitory function of the receptor and for regulation of Th cell differentiation in vivo.