Rabies, caused by rabies virus (RABV), is a fatal neurological disease that still causes more than 59,000 human deaths each year. Type III interferon IFN-λs are cytokines with type I IFN-like antiviral activities. Although IFN-λ can restrict the infection for some viruses, especially intestinal viruses, the inhibitory effect against RABV infection remains undefined. In this study, the function of type III IFN against RABV infection was investigated. Initially, we found that IFN-λ2 and IFN-λ3 could inhibit RABV replication in cells. To characterize the role of IFN-λ in RABV infection in a mouse model, recombinant RABVs expressing murine IFN-λ2 or IFN-λ3, termed as rB2c-IFNλ2 or rB2c-IFNλ3, respectively, were constructed and rescued. It was found that expression of IFN-λ could reduce the pathogenicity of RABV and limit viral spread in the brains by different infection routes. Furthermore, expression of IFN-λ could induce the activation of the JAK-STAT pathway, resulting in the production of interferon-stimulated genes (ISGs). It was also found that rRABVs expressing IFN-λ could reduce the production of inflammatory cytokines in primary astrocytes and microgila cells, restrict the opening of the blood-brain barrier (BBB), and prevent excessive infiltration of inflammatory cells into the brain, which could be responsible for the neuronal damage caused by RABV. Consistently, IFN-λ was found to maintain the integrity of tight junction (TJ) protein ZO-1 of BBB to alleviate neuroinflammation in a transwell model. Our study underscores the role of IFN-λ in inhibiting RABV infection, which potentiates IFN-λ as a possible therapeutic agent for the treatment of RABV infection.