Dendritic cells (DC) are unique in their ability to stimulate naive T cells to proliferate and to differentiate into effector T cells. DC, however, can also inhibit T cell activation and play a role in central and peripheral tolerance. IL-10 has been shown to render DC tolerogenic by unknown mechanisms. Using a combined monoclonal antibody/retroviral expression cloning approach, we show here that the inhibitory receptor LIR-2 (leukocyte immunoglobulin-like receptor-2, CD85d) is specifically up-regulated by IL-10 on maturing human DC. LPS-stimulated, LIR-2-transfected DC inhibited the proliferation of T cells in autologous, as well as allogeneic culture systems in vitro. In addition, overexpression of LIR-2 on resting T cells, which lack LIR-2 expression, inhibited T cell proliferation induced by TCR activation. A novel soluble form of LIR-2 was detected in culture supernatants of maturing DC. IL-10 treatment of DC potently inhibited the production of soluble LIR-2. Recombinant soluble LIR-2 was able to completely restore the proliferation of T cells activated with LPS-plus IL-10-treated DC. Thus, IL-10 renders DC hypostimulatory by up-regulating cell surface LIR-2 and by inhibiting soluble LIR-2 in vitro.