Transplantation tolerance is induced reliably in experimental animals following intrathymic inoculation with the relevant donor strain Ags; however, the immunological mechanisms responsible for the induction and maintenance of the tolerant state remain unknown. We investigated these mechanisms using TCR transgenic mice (TS1) that carry T cells specific for an immunodominant, MHC class II-restricted peptide (S1) of the influenza PR8 hemagglutinin (HA) molecule. We demonstrated that TS1 mice reject skin grafts that have transgene-encoded HA molecules (HA104) as their sole antigenic disparity and that intrathymic but not i.v. inoculation of TS1 mice with S1 peptide induces tolerance to HA-expressing skin grafts. Intrathymic peptide inoculation was associated with a dose-dependent reduction in T cells bearing high levels of TCR specific for HA. However, this reduction was both incomplete and transient, with a full recovery of S1-specific thymocytes by 4 wk. Peptide inoculation into the thymus also resulted in the generation of immunoregulatory T cells (CD4+CD25+) that migrated to the peripheral lymphoid organs. Adoptive transfer experiments using FACS sorted CD4+CD25- and CD4+CD25+ T cells from tolerant mice revealed that the former but not the latter maintain the capacity to induce rejection of HA bearing skin allografts in syngeneic hosts. Our results suggest that both clonal frequency reduction in the thymus and immunoregulatory T cells exported from the thymus are critical to transplantation tolerance induced by intrathymic Ag inoculation.