Expression of gp39 on activated T cells provides a co-stimulatory signal in peripheral lymphoid tissue that regulates humoral and cell-mediated immunity. The function of gp39 and its receptor CD40 in thymus remains uncertain. Here we report that overexpression of gp39 in transgenic mouse thymus caused a dose-dependent decline in thymocyte numbers (> 500 fold), loss of cortical epithelium and expansion of CD40+ medullary cells. Transplantation of transgenic bone marrow into normal mice indicated that gp39 significantly diminished thymocyte viability in the context of a 'normal' thymic environment. The peripheral tissues of transgenic mice also accumulated abnormalities in a transgene dose-dependent manner that involved inflammation and lymphoid tissue hypertrophy. Animals with the highest transgene copy numbers acquired a lethal inflammatory bowel disease marked by the infiltration of gp39+ T cells and CD40+ cells into diseased tissues. Examination of cells overexpressing gp39 suggested that these defects were caused, in part, by the saturation of a mechanism that sequesters gp39 inside non-activated cells and thus protects the immune system from inappropriate gp39-CD40 interaction. These results establish a regulatory role for gp39 in thymus function and a causal relationship in mediating chronic inflammatory disease.