TGF-beta1 prevents the development of autoimmune disease by restraining the development of autoreactive Th1 cells. TGF-beta1 inhibits Th1 development in part by suppressing the expression of T-bet, an IFN-gamma-induced transcription factor that promotes Th1 differentiation, but how TGF-beta1 suppresses T-bet is not known. In this study we show that TGF-beta1 suppresses IFN-gamma-induced T-bet expression through the hemopoietic protein tyrosine phosphatase (PTP) Src homology region 2 domain-containing phosphatase-1 (Shp-1). In murine CD4+ T cells, IFN-gamma rapidly induced the expression of T-bet as well as of IFN regulatory factor-1, another transcription factor important for Th1 development. TGF-beta1 antagonized the effects of IFN-gamma, inhibiting IFN-gamma's induction of both Th1 transcription factors. In the presence of IFN-gamma, TGF-beta1 rapidly induced in Th cells the synthesis of the PTP Shp-1, but did not induce Shp-2 or several members of the suppressor of cytokine signaling family of Jak-Stat inhibitors. We tested the requirement for Shp-1 by using T cells from the Shp-1-deficient me(v)/me(v) mouse strain. Shp-1 was required for TGF-beta1's suppressive effects, because its suppression of T-bet and IFN regulatory factor-1 was completely abrogated in me(v)/me(v) CD4+ T cells. Receptor-proximal responses to IFN-gamma, such as the induction of Jak-Stat phosphorylation, were inhibited by TGF-beta1 in wild-type T cells, but not in me(v)/me(v) T cells. Consistent with a direct role for Shp-1, TGF-beta1's inhibition of IFN-gamma-induced Stat1 phosphorylation was sensitive to the general PTP inhibitor pervanadate. Together, these data show that TGF-beta1 suppresses IFN-gamma signaling and transcriptional responses in CD4+ T cells through the PTP Shp-1.