Signals controlling the generation of regulatory B (Breg) cells remain ill-defined. Here we report an "auto"-regulatory feedback mechanism between plasmacytoid dendritic cells (pDCs) and Breg cells. In healthy individuals, pDCs drive the differentiation of CD19⁺CD24^hiCD38^hi (immature) B cells into IL-10-producing CD24⁺CD38^hi Breg cells and plasmablasts, via the release of IFN-α and CD40 engagement. CD24⁺CD38^hi Breg cells conversely restrained IFN-α production by pDCs via IL-10 release. In systemic lupus erythematosus (SLE), this cross-talk was compromised; pDCs promoted plasmablast differentiation but failed to induce Breg cells. This defect was recapitulated in healthy B cells upon exposure to a high concentration of IFN-α. Defective pDC-mediated expansion of CD24⁺CD38^hi Breg cell numbers in SLE was associated with altered STAT1 and STAT3 activation. Both altered pDC-CD24⁺CD38^hi Breg cell interactions and STAT1-STAT3 activation were normalized in SLE patients responding to rituximab. We propose that alteration in pDC-CD24⁺CD38^hi Breg cell interaction contributes to the pathogenesis of SLE.