The mechanism of activation of transglutaminase 2 (TG2) in the extracellular matrix remains a fundamental mystery in our understanding of the biology of this multifunctional mammalian enzyme. Earlier investigations have highlighted the role of a disulfide bond formed by vicinal Cys residues in maintaining calcium-bound TG2 in an inactive state. Here, we have shown that the redox potential of this disulfide bond is approximately -190 mV, a high value for a disulfide bond in proteins. Consistent with this observation, TG2 activity in a freshly wounded fibroblast culture depends upon the redox potential of the environment. We sought to identify a physiological mechanism for the activation of oxidized TG2. With a k(cat)/K(m) of 1.6 μm(-1) min(-1), human thioredoxin (Trx) was a highly specific activator of oxidized human TG2. Trx-mediated activation of TG2 was blocked by PX-12, a small molecule Trx inhibitor that is undergoing clinical trials as a cancer chemotherapeutic agent. In a mixed culture containing fibroblasts and monocytic cells, interferon-γ stimulated Trx release from monocytes, which in turn activated TG2 around the fibroblasts. Recombinant human Trx could also activate extracellular TG2 in cryosections of human and mouse small intestinal biopsies. In addition to explaining how TG2 can be activated by dietary gluten in the small intestinal mucosa of celiac sprue patients, our findings reveal a new strategy for inhibiting the undesirable consequences of TG2 activity in this widespread, lifelong disease.