Oligodendrocyte-type 2 astrocyte progenitor cells (O-2A/OPCs) populate the CNS and generate oligodendrocytes and astrocytes in vitro and in vivo. Understanding how O-2A/OPCs respond to their environment is crucial to understanding how these cells function in the CNS and how to best promote their therapeutic proliferation and differentiation. We show that interferon-γ (IFN-γ) was not toxic to highly purified perinatal or adult rat O-2A/OPCs. IFN-γ treatment led to downregulation of PDGFR-α (platelet-derived growth factor receptor-α) and Ki-67 and decreased self-renewal in clonal populations. IFN-γ also significantly increased the proportion of cells in the G(0)/G(1) phase of the cell cycle, decreased BrdU (5-bromo-2'-deoxyuridine) incorporation, and led to increased expression of the cell cycle inhibitors Rb and p27(kip1). Although p27(kip1) expression was not necessary for IFN-γ-mediated quiescence, its upstream regulator IRF-1 was required. The quiescent state of O-2A/OPCs caused by IFN-γ was reversible as the withdrawal of IFN-γ allowed O-2A/OPCs to appropriately respond to both proliferation and differentiation signals. Differentiation into oligodendrocytes induced by either thyroid hormone or CNTF was also abrogated by IFN-γ. This inhibition was specific to the oligodendrocyte pathway, as O-2A/OPC differentiation into astrocytes was not inhibited. IFN-γ alone also led to the generation of GFAP-positive astrocytes in a subset of O-2A/OPCs. Together, these results demonstrate a reversible inhibitory effect of IFN-γ on O-2A/OPC proliferation with a concomitant generation of astrocytes. We propose that neuroinflammation involving increased IFN-γ can reduce progenitor numbers and inhibit differentiation, which has significant clinical relevance for injury repair, but may also contribute to the generation of astrocytes.