PD-1H is a recently identified cell surface coinhibitory molecule of the B7/CD28 immune modulatory gene family. We showed previously that single injection of a PD-1H agonistic mAb protected mice from graft-versus-host disease (GVHD). In this study, we report two distinct mechanisms operate in PD-1H–induced T cell tolerance. First, signaling via PD-1H coinhibitory receptor potently arrests alloreactive donor T cells from activation and expansion in the initiation phase. Second, donor regulatory T cells are subsequently expanded to maintain long-term tolerance and GVHD suppression. Our study reveals the crucial function of PD-1H as a coinhibitory receptor on alloreactive T cells and its function in the regulation of T cell tolerance. Therefore, PD-1H may be a target for the modulation of alloreactive T cells in GVHD and transplantation.