Interferon-gamma (IFN-gamma) is produced during the response to infection and participates in immunostimulatory events. We have previously reported the induction of diabetes in transgenic mice (ins-IFN-gamma) in which the expression of the lymphokine IFN-gamma is directed by the insulin promoter. This diabetes is a result of the progressive destruction of pancreatic islets that occurs with the influx of inflammatory cells. Here we demonstrate that this islet cell loss is mediated by lymphocytes, that engrafted histocompatible islets are destroyed, and that lymphocytes from the transgenic mice are cytotoxic to normal islets in vitro. These results indicate that the pancreatic expression of IFN-gamma can result in a loss of tolerance to normal islets, consistent with its role as an inducer of costimulatory activity, which is essential for lymphocyte activation during an immune response.