Lymphocyte activation gene (LAG)-3 (CD223) is a CD4-related activation-induced cell surface molecule that binds to MHC class II molecules with high affinity and negatively regulates T cell expansion and homeostasis. In this study, we show that LAG-3 inhibits CD4-dependent, but not CD4-independent, T cell function via its cytoplasmic domain. Although high affinity interaction with MHC class II molecules is essential for LAG-3 function, tailless LAG-3 does not compete with CD4 for ligand binding. A single lysine residue (K468) within a conserved “KIEELE” motif is essential for interaction with downstream signaling molecules. These data provide insight into the mechanism of action of this important T cell regulatory molecule.