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Interferon-alpha (IFN-alpha) inhibits the development of diabetes in animal models of autoimmune diabetes. However, the mechanism of the action is not fully understood and drug toxicity could limit its potential clinical utility. Interferon-tau (IFN-tau) is another type 1 interferon, which has less toxicity but may have different biologic activity than IFN-alpha. This study explores the effect of IFN-tau on the diabetic process in non-obese diabetic (NOD) mice. IFN-tau by intraperitoneal, subcutaneous, or oral routes of administration decreased the development of spontaneous diabetes in NOD mice. Islet inflammation was decreased 50%. IFN-tau administration to recipient mice prevented the development of passively transferred and cyclophosphamide accelerated diabetes. IFN-tau treatment also decreased anti-islet effector activity of NOD splenic cells. Immunoregulatory activity of splenic cells was augmented by IFN-tau administration as was the number of splenic CD25+CD4+ cells. Concanavalin A (Con A)-induced release of IFN-gamma was decreased in spleen cells from IFN-tau treated mice. In conclusion, IFN-tau inhibits spontaneous autoimmune diabetes and passively transferred diabetes in the NOD mouse. This diabetes sparing activity may be due to an induction of regulatory cells, possibly CD25+CD4+ T cells, which in turn inhibit anti-islet effector cell activity and the development of insulitis and diabetes. Due to the lower drug toxicity, IFN-tau could be a better drug candidate than IFN-alpha for experimental clinical trials.