The CD28 costimulatory receptor is a critical regulator of T cell function, making it an attractive therapeutic target for the treatment of immune-mediated diseases. CTLA4Ig, now approved for use in humans, prevents naive T cell activation by binding to B7 proteins and blocking engagement of CD28. However, CTLA4Ig suppresses inflammation even if administered when disease is established, suggesting alternative mechanisms. We identified a novel, CD28-independent mechanism by which CTLA4Ig inhibits activated T cells. We show that in vitro, CTLA4Ig synergizes with NO from bone marrow-derived macrophages to inhibit T cell proliferation. Depletion of regulatory T cells (Tregs) or interference with TGF-β signaling abrogated the inhibitory effect of CTLA4Ig. Parallel in vivo experiments using an allergic airway inflammation model demonstrated that this novel mechanism required both macrophages and regulatory T cells. Furthermore, CTLA4Ig was ineffective in SMAD3-deficient mice, supporting a requirement for TGF-β signaling. Thus, in addition to preventing naive T cells from being fully activated, CTLA4Ig can turn off already activated effector T cells by an NO/regulatory T cell/TGF-β-dependent pathway. This mechanism is similar to cell-extrinsic effects of endogenous CTLA4 and may be particularly important in the ability of CTLA4Ig to treat chronic inflammatory disease.