CD26 is a T cell costimulatory molecule with dipeptidyl peptidase IV activity in its extracellular region. We previously reported that recombinant soluble CD26 enhanced T cell proliferation induced by the recall antigen tetanus toxoid (TT). However, the mechanism involved in this enhancement is not yet elucidated. We now demonstrate that CD26 binds Caveolin-1 on antigen-presenting cells, and that residues 201-211 of CD26 along with the serine catalytic site at residue 630 contribute to binding to caveolin-1 scaffolding domain. In addition, after CD26 -caveolin-1 interaction on TT-loaded monocytes, caveolin-1 is phosphorylated, which links to activate NF-B, followed by up-regulation of CD86. Finally, reduced caveolin-1 expression on monocytes inhibits CD26-mediated CD86 up-regulation and abrogates CD26 effect on TT-induced T cell proliferation. Taken together, these results strongly suggest that CD26 -caveolin-1 interaction plays a role in the up-regulation of CD86 on TT-loaded monocytes and subsequent engagement with CD28 on T cells, leading to antigen-specific T cell activation. C D26 is a widely distributed, 110-kDa cell-surface glycoprotein with known dipeptidyl peptidase IV (DPPIV) (EC 3.4.14.5) activity in its extracellular domain (1, 2), capable of cleaving amino-terminal dipeptides with either L-proline or L-alanine at the penultimate position. The CD4 ϩ CD26 high T cells respond maximally to recall antigens, such as tetanus toxoid (TT) (3). Crosslinking of CD26 and CD3 with solid-phase immobilized mAbs induces T cell costimulation and IL-2 production by either human CD4 ϩ T cells or CD26 Jurkat transfectants (4, 5, 6). Importantly, DPPIV enzyme activity is required for CD26-mediated T cell costimulation (7). More recently, we have shown that internalization of CD26 after crosslinking is mediated in part by the mannose-6-phosphate͞ insulin-like growth factor II receptor (M6P͞IGF-IIR), and that CD26-M6P͞IGFIIR interaction plays a role in CD26-induced T cell costimulation (8).Caveolin-1 was first identified as a major tyrosine phosphorylated protein in v-Src-transformed chicken embryo fibroblasts (9). Multiple lines of evidence suggest that caveolin-1 acts as a scaffolding protein capable of directly interacting with and modulating the activity of caveolin-bound signaling molecules. In support of this hypothesis, caveolin-1 binding can functionally modulate the activity of G protein-coupled proteins, membrane proteins, nonreceptor tyrosine and serine͞threonine kinases, protein kinase C isoforms, epidermal growth factor receptor, and endothelial nitric oxide synthetase (10, 11). In immune cells, caveolin-1 on monocytes͞ macrophages regulates metabolism of scavenged lipids (12). However, it is unknown whether caveolin-1 also plays a role in signal transduction in antigen-presenting cells (APC).Maximal T cell activation requires both an antigen-specific stimulus provided by an MHC peptide complex and a costimulatory signal (13). Engagement of CD28 on T cell surface by B7-1 (CD80) or B7-2 (CD86) expressed on AP...