Aberrant expression of IFN-gamma has been demonstrated to cause a wide variety of alterations in cell function and development. Previously we reported that constitutive expression of IFN-gamma in bone marrow (BM) and thymus results in a total absence of B cells and a substantial decrease in the number of hematopoietic progenitor cells. In this study, we demonstrate a severe deficiency of NK1.1(+)CD3(-) cells in this transgenic mouse model. Compared with normal control littermates, we found a pronounced reduction of NK cells in IFN-gamma transgenic mouse spleen and liver despite maintenance of normal function. In addition, we observed a reduced number of BM cells in the IFN-gamma transgenic mouse despite normal expression of hematopoietic growth factors in the BM. Interestingly, these cells were less responsive to stem cell factor (SCF) despite c-kit expression on hematopoietic stem cells (HSCs). We observed that addition of exogenous IFN-gamma inhibited proliferation of HSCs and differentiation of NK precursors from HSCs in normal mice in response to SCF, IL-7, fms-like tyrosine kinase 3 ligand, and IL-15. Furthermore, we found that HSCs express the IFN-gammaRalpha subunit and undergo apoptosis in response to exogenous IFN-gamma. Thus, we have demonstrated the occurrence of a severe deficiency of NK cells and lower numbers of BM cells in an IFN-gamma transgenic mouse model. Furthermore, because exogenous IFN-gamma affects the responsiveness to hematopoietic growth factors such as SCF in vitro, our results indicate that chronic expression of IFN-gamma in vivo leads to widespread immune system defects, including alterations in NK cell differentiation.