Human embryonic stem cells (hESCs) can proliferate extensively in culture and give rise to progeny of the three germ layers. Several reports suggested that mouse and hESCs may attenuate immune responses. In this study, we focused on the mechanism by which hESCs inhibit T cell responses. Using coculture experiments, we demonstrate that hESCs inhibit cytokine secretion and T cell proliferation in response to potent T cell activators. Furthermore, we show that hESCs downmodulate the TCR-associated CD3-zeta chain. These effects are maintained when hESCs are replaced by their conditioned media and can be restored by the addition of L-arginine to hESC-conditioned media or by treatment of hESCs with a specific arginase inhibitor. Moreover, we show arginase-I expression and activity in hESCs. We further demonstrate that mouse ESCs (mESCs) similarly inhibit T cell activation via arginase I, suggesting an evolutionary conserved mechanism of T cell suppression by ESCs. In addition, we demonstrate that arginase I expression is not limited to ESCs in culture, but can also be detected in the inner cell mass and the trophectoderm of preimplantation mouse embryos and hESC-derived trophectoderm cells. Finally, T cells infiltrating ESC-derived teratomas have significantly lower levels of CD3-zeta chain. Collectively, the data indicate a role for ESC-arginase I activity in the attenuation of T cell activation.