CD26, a T cell activation Ag, also known as dipeptidyl peptidase IV, is directly associated with adenosine deaminase (ADA) on the surface of T cells and T cell lines. In the present study, we examined both the binding of ADA and CD26 and the functional consequences of this interaction. We found that ADA was associated with CD26 on T cell lines lacking either ADA or dipeptidyl peptidase IV enzymatic activity, indicating that the association between dipeptidyl peptidase IV and ADA did not require enzymatic activity. Moreover, using immunoelectron microscopy, we demonstrated that CD26 and ADA co-localized on the cell surface, but not inside cells, suggesting that CD26 did not transport ADA to the surface. In keeping with this observation, we showed that human CD26-transfected murine pre-B cell lines lacking human ADA acquired ADA from an extracellular source. More importantly, adenosine in the absence of cell surface ADA inhibited T cell proliferation and IL-2 production induced by various stimuli. On the other hand, cells expressing ADA and CD26 on the surface were much more resistant to the inhibitory effect of adenosine. These data suggest that ADA on the cell surface is involved in an important immunoregulatory mechanism by which released ADA binds to cell surface CD26, and this complex is capable of reducing the local concentration of adenosine.