IFN-gamma has a dual function in the regulation of T cell homeostasis. It promotes the expansion of effector T cells and simultaneously programs their contraction. The cellular mechanisms leading to this functional dichotomy of IFN-gamma have not been identified to date. In this study we show: 1) that expansion of wild-type CD8+ T cells is defective in IFN-gamma-deficient mice but increased in IFN-gammaR-deficient mice; and 2) that contraction of the effector CD8+ T cell pool is impaired in both mouse strains. Furthermore, we show that CD11b+ cells responding to IFN-gamma are sufficient to limit CD8+ T cell expansion and promote contraction. The data presented here reveal that IFN-gamma directly promotes CD8+ T cell expansion and simultaneously induces suppressive functions in CD11b+ cells that counter-regulate CD8+ T cell expansion, promote contraction, and limit memory formation. Thus, innate immune cells contribute to the IFN-gamma-dependent regulation of Ag-specific CD8+ T cell homeostasis.