T cell activation by antigen-presenting cells (APC) is regulated by positive and negative costimulatory molecules in the B7 family. Here we describe a novel addition in this family, designated as B7S1, which is uniquely anchored to the cell membrane via a GPI linkage. B7S1 is expressed on professional APC and widely distributed in nonlymphoid tissues. A soluble B7S1-Ig fusion protein binds to activated but not naive T cells. B7S1-Ig inhibits T cell activation and IL-2 production. A monoclonal antibody that blocks binding of B7S1 to its receptor enhances T cell proliferation in vitro and exacerbates experimental autoimmune encephalomyelitis in vivo. This study identifies a novel negative regulator of T cell activation and further reveals complex costimulatory regulation of immune responses.