The liver is unique among transplanted organs with respect to its interaction with the host immune system. There is evidence, both anecdotal and documented, that some liver recipients who cease taking immunosuppressive drugs maintain allograft function, suggesting robust tolerance is in place. Moreover, recipients of human liver allografts require less immunosuppression than do other organ recipients, and liver transplants confer protection on other organ grafts from the same donor. Hence, the liver shows features of immune privilege. Still, the liver can display destructive immunologic processes such as rejection in approximately one quarter of patients. The understanding of the cellular and molecular mechanisms operant in tolerance vs allograft rejection is important for developing new agents to improve long-term outcome, minimize infectious complications (including recurrence of hepatotropic viruses), and deliver immunosuppression without long-term toxicity. This review describes the unique aspects of the hepatic immune response, the pathways involved in T-cell activation and alloantigen recognition, effector cells and pathways mediating liver allograft rejection, the role of regulatory T cells, and targets of current and future immunosuppressive agents.