CD4+CD25+Foxp3+ regulatory T cells (Tregs) play a key role in the induction and maintenance of peripheral tolerance. Rapid and transient production of IFN-gamma by Tregs from mice tolerized to alloantigen in vivo has been shown to be critical for their regulatory function. This IFN-gamma has the potential to affect the function of cells present in the same local microenvironment as the Tregs, including the Tregs themselves. Here we investigated the mechanism by which IFN-gamma produced by Tregs triggered signaling pathways in alloantigen reactive Tregs themselves thereby influencing their function in vivo. We show that IFN-gamma production and STAT1 activation was increased, while STAT1-dependent PKB/AKT activation was downregulated in alloantigen reactive Tregs. Further, the activation of STAT1 was blocked in IFN-gamma receptor deficient as well as IFN-gamma-deficient Tregs, suggesting that IFN-gamma produced by the alloantigen reactive Tregs might act in an autocrine manner to induce STAT1 activation. Importantly, STAT1-deficient Tregs failed to control allograft rejection in vivo. Overall, these findings suggest that the IFN-gamma-induced STAT1-PKB/AKT signaling pathway plays a key role in upregulating the ability of alloantigen reactive Tregs to control graft rejection in vivo.