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 (Tg(b/d)), Tg iIELs were Thy-1-, CD44+, CD45R (B220)+, and CD5+, whereas in syngeneic Tg(d/d) mice, iIELs were Thy-1+, CD44-, and CD45R- with a subset of CD5+ cells. Previously, we had shown that tolerance for Tg(b/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 Tg(b/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.