Maintenance of homeostasis in the immune system involves competition for resources between T lymphocytes, which avoids the development of immune pathology seen in lymphopenic mice. CD25⁺CD4⁺ T cells are important for homeostasis, but there is as yet no consensus on their mechanisms of action. Although CD25⁺CD4⁺ T cells cause substantial down-regulation of IL-2 mRNA in responder T cells in an in vitro co-culture system, the presence of IL- protein can be demonstrated by intracellular staining. As a consequence of competition for IL-2, CD25⁺CD4⁺ T cells further up-regulate the IL-2R α chain (CD25), a process that is strictly dependent on IL-2, whereas responder T cells fail to up-regulate CD25. Similarly, adoptive transfer into lymphopenic mice showed that CD25⁺CD4⁺ T cells interfere with CD25 up-regulation on co-transferred naive T cells, while increasing their own CD25 levels. IL-2 sequestration by CD25⁺CD4⁺ T cells is not a passive phenomenon but instead initiates—in conjunction with signals through the TCR—their differentiation to IL-10 production. Although IL-10 is not required for in vitro suppression, it is vital for the in vivo function of regulatory T cells. Our data provide a link explaining the apparent difference in regulatory mechanisms in vitro and in vivo.