Ptpn22 encodes PEST domain–enriched tyrosine phosphatase (Pep), which negatively regulates TCR proximal signaling and is strongly associated with a variety of autoimmune diseases in humans. The net effect of Pep on the balance of immunity and tolerance is uncertain because of the simultaneous inhibition of TCR-mediated signaling of effector and regulatory T cells (T regs). In this study, we generated transgenic NOD mice that overexpressed Pep in T cells. The transgenic mice had a significantly lower incidence of spontaneous autoimmune diabetes, which was accompanied by fewer IFN-γ–producing T cells, and an increased ratio of CD4+ Foxp3+ T regs to CD4+ IFN-γ+ or to CD8+ IFN-γ+ T cells, respectively, in pancreatic islets. Transgenic T cells showed markedly decreased TCR-mediated effector cell responses such as proliferation and Th1 differentiation. By contrast, the inhibitory effect of transgenic Pep on TCR signaling did not affect the differentiation of T regs or their suppressive activity. Adoptive transfer experiments showed that transgenic splenocytes exhibited attenuated diabetogenic ability. To examine further the pathogenic features of transgenic T cells, we generated Ptpn22/BDC2. 5 doubly transgenic mice and found reduced proliferation and Th1 differentiation in CD4+ T lymphocytes with additional Pep in pancreatic lymph nodes but not in inguinal lymph nodes of NOD/SCID recipients. This finding indicates that transgenic Pep attenuates T cell functions in an islet Ag–driven manner. Taken together, our results demonstrate that Pep overexpression in T cells attenuates autoimmune diabetes in NOD mice by preferentially modulating TCR signaling–mediated functions in diabetogenic T cells but not in T regs.