An adequate effector response against pathogens and its subsequent inactivation after pathogen clearance are critical for the maintenance of immune homeostasis. This process involves an initial phase of T-cell effector (Teff) activation followed by the expansion of regulatory T cells (Tregs), a unique cell population that limits Teff functions. However, significant questions remain unanswered about the mechanisms that regulate the balance between these cell populations. Using an in vitro system to mimic T-cell activation in human peripheral blood mononuclear cells (PBMC), we analysed the patterns of Treg and Teff activation, with special attention to the role of type I interferon (IFN-I). Interestingly, we found that IFN-alpha, either exogenously added or endogenously induced, suppressed the generation of CD4(+) FoxP3(HI )IFN-gamma(Neg) activated Tregs (aTregs) while simultaneously promoting propagation of CD4(+) FoxP3(Low/Neg )IFN-gamma(Pos) activated Teffs (aTeffs). We also showed that IFN-alpha-mediated inhibition of interleukin (IL)-2 production may play an essential role in IFN-alpha-induced suppression of aTregs. In order to test our findings in a disease state with chronically elevated IFN-alpha, we investigated systemic lupus erythematosus (SLE). Plasma from patients with SLE was found to contain IFN-I activity that suppressed aTreg generation. Furthermore, anti-CD3 activated SLE PBMCs exhibited preferential expansion of aTeffs with a very limited increase in aTreg numbers. Together, these observations support a model whereby a transient production of IFN-alpha (such as is seen in an early antiviral response) may promote CD4 effector functions by delaying aTreg generation, but a chronic elevation of IFN-alpha may tip the aTeff:aTreg balance towards aTeffs and autoimmunity.