Interferon-gamma (IFN-gamma) has been shown to inhibit human immunodeficiency virus (HIV) replication in macrophages. However, the site of its effect on the HIV infectious cycle is unknown. We show here that IFN-gamma inhibits the transactivation of HIV long terminal repeat (LTR) during viral infection and that it antagonizes tat effect in HT4LacZ-1 cells. HT4LacZ-1 is an indicator CD4+ HeLa cell line for HIV infectivity, because it harbors a HIV LTR-LacZ gene susceptible to transactivation by tat. It was used in combination with a computer-assisted image analyzer to quantify: (i) the number of transactivated foci following HIV infection, (ii) their individual level of transactivation, and (iii) the fusion potency of infected cells. IFN-gamma induced a 75% decrease of the number of transactivated foci following infection of HT4LacZ-1 cells by HIV. The remaining 25% foci still susceptible to transactivation were transactivated at a lower level than in control cultures, and the fusion potency of infected cells was strongly decreased. IFN-gamma acted after HIV entry into the cell and independently of reverse transcription. IFN-gamma antagonized tat-induced LTR transactivation: it inhibited transactivation of HT4LacZ-1 cells when tat was provided either from a SV40-based expression vector of tat or by polyethylene glycol-induced cell fusion with HeLa-tat-III cells. These results suggest that IFN-gamma affects the expression or the activity of cellular factors interacting with tat and that the high level of IFN-gamma production associated with HIV infection plays a role in the establishment of HIV latency.