The expression of interferon gamma (IFNgamma) increases after neural injury, and it is sustained in chronic inflammatory conditions such as multiple sclerosis and infection with human immunodeficiency virus. To understand how exposure to this proinflammatory cytokine might affect neural function, we examined its effects on cultures of neurons derived from the central and peripheral nervous systems. IFNgamma inhibits initial dendritic outgrowth in cultures of embryonic rat sympathetic and hippocampal neurons, and this inhibitory effect on process growth is associated with a decrease in the rate of synapse formation. In addition, in older cultures of sympathetic neurons, IFNgamma also selectively induces retraction of existing dendrites, ultimately leading to an 88% decrease in the size of the arbor. Dendritic retraction induced by IFNgamma represents a specific cellular response because it occurs without affecting axonal outgrowth or cell survival, and it is not observed with tumor necrosis factor alpha or other inflammatory cytokines. IFNgamma-induced dendritic retraction is associated with the phosphorylation and nuclear translocation of signal transducer and activator of transcription 1 (STAT1), and expression of a dominant-negative STAT1 construct attenuates the inhibitory effect of IFNgamma. Moreover, retrograde dendritic retraction is observed when distal axons are selectively exposed to IFNgamma. These data imply that IFNgamma-mediated STAT1 activation induces both dendritic atrophy and synaptic loss and that this occurs both at the sites of IFNgamma release and at remote loci. Regressive actions of IFNgamma on dendrites may contribute to the neuropathology of inflammatory diseases.