A fusion protein consisting of the extracellular domain of CTLA4 and an Ig C gamma 1 chain (CTLA4-Ig) was used to examine the distribution of the ligands for CTLA4 within the murine thymus and to characterize the nature of these ligands. Two-color immunofluorescence of thymus tissue revealed binding of the fusion protein to medullary thymic epithelial cells and dendritic cells within the corticomedullary and medullary areas of the thymus. Medullary cells binding the fusion protein also expressed MHC class II products and ICAM-1. Thymus tissue sections treated with cross-linking fixatives, such as glutaraldehyde, paraformaldehyde, or 1-ethyl-3(3-dimethylaminopropyl)-carbodiimide no longer bound the CTLA4 fusion protein, indicating that binding was very sensitive to the tertiary structure of the tissue ligand. The ability of thymic tissue to bind the fusion protein was developmentally regulated. At day 14 of gestation, only scattered single cells were labeled. Clusters of labeled cells, which were detected by day 16 of gestation, increased in frequency with advancing gestational age. Consistent with the in situ labeling studies, CTLA4-Ig also labeled several thymic epithelial cell lines previously shown to have a medullary phenotype. Polymerase chain reaction analysis of mRNA extracted from these cells indicated they contained mRNA for B7, a known counter receptor for CTLA4 and CD28. Immunoprecipitation of 125I-labeled thymic epithelial cells with the CTLA4-Ig detected a M(r) 65,000 to 70,000 species under reducing conditions, consistent with previous studies of B7. These data suggest that the ligand for CTLA4 expressed by thymic epithelial cells in vitro is B7 and that the expression of this ligand in situ is largely restricted to the medullary compartment and is associated with epithelial cells and dendritic cells.