The present study examined the mechanism(s) of tolerance induction for intestinal intraepithelial lymphocytes (iIELs) using an alloantigen (Ag)-specific gamma/delta T cell receptor (TCR gamma/delta) transgenic (Tg) model. In Tg Ag-bearing H-2b/d mice (Tgb/d), Tg iIELs were Thy-1-, CD44+, CD45R (B220)+, and CD5+, whereas in syngeneic Tgd/d mice, iIELs were Thy-1+, CD44-, and CD45R- with a subset of CD5+ cells. Previously, we had shown that tolerance for Tgb/d iIELs involved functional anergy and deletion (Barrett, T. A., M. L. Delvy, D. M. Kennedy, L. Lefrancois, L. A. Matis, A. L. Dent, S. M. Hedrick, and J. A. Bluestone. 1992. J. Exp. Med. 175:65). In this study we demonstrate that Tgb/d iIELs expressing dull levels of Thy-1 proliferated in the presence of exogenous rIL-2. A direct precursor-product relationship between the Thy-1+-responsive iIELs and the tolerant Thy-1dul/- iIELs was demonstrated by adoptive transfer into severe combined immunodeficient (SCID) mice. Tg Thy-1+ iIELs reconstituting Ag+ but not Ag- SCID mice downregulated Thy-1 after Ag exposure in vivo. Analysis of bone marrow (BM) chimeras demonstrated the persistence of Tg IELs in all Ag+ chimeras although a modest degree of clonal deletion was apparent. The greatest percentage of Tg IELs were detected when Ag was restricted to radioresistant cells (e.g., epithelial cells) compared with BM-derived antigen-presenting cells (APC). This was especially apparent in thymectomized chimeric mice. Consistent with the notion that Ag-bearing epithelial cells may be poor APC, isolated intestinal epithelial cells from Ag-bearing mice failed to stimulate Tg iIELs compared with splenic APC. These studies suggest that the major population of TCR gamma/delta iIELs were probably extrathymically derived and encountered self-Ag on intestinal epithelial cells. The induction of tolerance likely involved an activation event resulting in downregulation of Thy-1. These mechanisms of tolerance for TCR gamma/delta iIELs led to the persistence of a reservoir of self-reactive T cells with the potential for mediating autoimmune disease.