NO and IFN-γ have normally been considered cytotoxic and proinflammatory molecules, respectively, in the setting of the central nervous system inflammatory disease autoimmune encephalomyelitis (EAE). Using mice lacking the ligand binding chain of the IFN-γ receptor (IFNγR−/−), we have previously shown that IFN-γ is not essential for myelin oligodendrocyte glycoprotein peptide (MOG 35–55) induced EAE expression but is in fact essential for its down-regulation. Here we examined the downstream molecular and cellular mechanism (s) of IFN-γ regulation and demonstrate that neither IL-4 nor IL-10 appear to play a role in down-regulation nor do various lymphoid cell populations. Cells of the macrophage lineage are key to down-regulation as evidenced by the fact that peritoneal exudate cells from IFNγR+/+ mice inhibit Ag-driven proliferation of IFNγR−/− lymphocytes, whereas IFNγR−/− peritoneal exudate cells do not. High levels of reactive nitrogen intermediates are detected in the former cultures but not the latter, and the inhibition of proliferation is reversible with an inhibitor of inducible NO synthase, indicating a key role for NO in down-regulation. Studies with bone marrow chimeras indicate that down-regulation occurs not only systemically but also within the target tissue. These data suggest that IFN-γ down-regulates EAE by inducing inducible NO synthase and subsequently NO production, both by macrophages in the periphery and, by inference, microglia and astrocytes in the target tissue.