Obliterative bronchiolitis is a potentially life-threatening noninfectious pulmonary complication after allogeneic hematopoietic stem cell transplantation and the only pathognomonic manifestation of pulmonary chronic graft-versus-host disease (cGVHD). In the current study, we identified a novel effect of IL-26 on transplant-related obliterative bronchiolitis. Sublethally irradiated NOD/Shi-scidIL2rγnull mice transplanted with human umbilical cord blood (HuCB mice) gradually developed clinical signs of graft-versus-host disease (GVHD) such as loss of weight, ruffled fur, and alopecia. Histologically, lung of HuCB mice exhibited obliterative bronchiolitis with increased collagen deposition and predominant infiltration with human IL-26+CD26+CD4 T cells. Concomitantly, skin manifested fat loss and sclerosis of the reticular dermis in the presence of apoptosis of the basilar keratinocytes, whereas the liver exhibited portal fibrosis and cholestasis. Moreover, although IL-26 is absent from rodents, we showed that IL-26 increased collagen synthesis in fibroblasts and promoted lung fibrosis in a murine GVHD model using IL-26 transgenic mice. In vitro analysis demonstrated a significant increase in IL-26 production by HuCB CD4 T cells following CD26 costimulation, whereas Ig Fc domain fused with the N-terminal of caveolin-1 (Cav-Ig), the ligand for CD26, effectively inhibited production of IL-26. Administration of Cav-Ig before or after onset of GVHD impeded the development of clinical and histologic features of GVHD without interrupting engraftment of donor-derived human cells, with preservation of the graft-versus-leukemia effect. These results therefore provide proof of principle that cGVHD of the lungs is caused in part by IL-26+CD26+CD4 T cells, and that treatment with Cav-Ig could be beneficial for cGVHD prevention and therapy.