Murine CMV (MCMV), a beta-herpesvirus, infects dendritic cells (DC) and impairs their function. The underlying events are poorly described. In this study, we identify MCMV m138 as the viral gene responsible for promoting the rapid disappearance of the costimulatory molecule B7-1 (CD80) from the cell surface of DC. This was unexpected, as m138 was previously identified as fcr-1, a putative virus-encoded FcR. m138 impaired the ability of DC to activate CD8+ T cells. Biochemical analysis and immunocytochemistry showed that m138 targets B7-1 in the secretory pathway and reroutes it to lysosomal associated membrane glycoprotein-1+ compartments. These results show a novel function for m138 in MCMV infection and identify the first viral protein to target B7-1.