Programmed death 1 (PD-1), an inhibitory receptor expressed on activated lymphocytes, regulates tolerance and autoimmunity. PD-1 has two ligands: PD-1 ligand 1 (PD-L1), which is expressed broadly on hematopoietic and parenchymal cells, including pancreatic islet cells; and PD-L2, which is restricted to macrophages and dendritic cells. To investigate whether PD-L1 and PD-L2 have synergistic or unique roles in regulating T cell activation and tolerance, we generated mice lacking PD-L1 and PD-L2 (PD-L1/PD-L2(-/-) mice) and compared them to mice lacking either PD-L. PD-L1 and PD-L2 have overlapping functions in inhibiting interleukin-2 and interferon-gamma production during T cell activation. However, PD-L1 has a unique and critical role in controlling self-reactive T cells in the pancreas. Our studies with bone marrow chimeras demonstrate that PD-L1/PD-L2 expression only on antigen-presenting cells is insufficient to prevent the early onset diabetes that develops in PD-L1/PD-L2(-/-) non-obese diabetic mice. PD-L1 expression in islets protects against immunopathology after transplantation of syngeneic islets into diabetic recipients. PD-L1 inhibits pathogenic self-reactive CD4+ T cell-mediated tissue destruction and effector cytokine production. These data provide evidence that PD-L1 expression on parenchymal cells rather than hematopoietic cells protects against autoimmune diabetes and point to a novel role for PD-1-PD-L1 interactions in mediating tissue tolerance.