The mechanism underlying suppression of immune responses by interleukin-4 (IL-4) has remained unexplained. Here we show that the antigen-presenting dendritic cell is central to counter-regulation of autoimmune disease by IL-4. IL-4 acts at the locus of the dendritic cell to decrease the cytolytic T-cell response, preventing autoimmunity. Stimulation of cytotoxic precursors by antigen pulsed dendritic cells induces their differentiation but the process is blocked by IL-4. IL-4-influenced DC produce distinct effects on CD8+ T cells depending on their state of activation. The molecular basis for this regulation is the alteration of the expression ratio of the costimulatory ligands B7.1/B7.2 on dendritic cells. Our findings demonstrate that B7.2 induces expansion of CD8+ T cells and B7.1 governs their acquisition of cytolytic activity. IL-4 influences the dendritic cell to elicit qualitative differences in T-cell responses, providing the basis for counter-regulation mediated by IL-4.